Bank of daughter paying off parent's mortgage

reveller

Hi, I'm looking for ideas.

I've recently inherited some money and would like to give my mum £25k to pay off her mortgage as she retired early from the NHS due to stress and ill health caused by 12 hour shifts with no breaks and cuts threatening her already small pension.

Her mortgage payments are roughly equal to her pension of about £200 a month so paying it off would make a big difference to her.

For me, I would benefit as it would be a sum of money that I can't touch for hopefully at least a few decades so no chance of me wasting it.

I'm concerned though that unless I set up something formal, if she is her husband need care when they're older, it will be taken by the government to pay for that and then I'll get nothing back.

Some ideas I've had in my head but not researched:

Zero interest lifetime loan.
Use the money to buy a relative share in the house
Some sort of trust?

I'd be keen to get some ideas. I'm thinking this way not just because it would be nice to get the money back but because I don't think my mum would accept the money outright as she'd rather see me financially secure so I think doing something like this would help both of us.

elephantrosie

if you buy a share of the property, how much is the solicitor fees?

trailingspouse

I think you need to decide what this money will actually be, a gift or a loan - if it's a gift, then you would not be expecting to get it back, but if it's a loan you have an expectation of getting it back. It's nice to give, the problems arise when you want something in return. You could just give them the money and hope for the best as regards getting any or all of it back.

From the words you've used ('my mum', 'her husband') I'm assuming that her husband isn't your dad? This needs to be thought about too - do they own the house together (you talk about 'her mortgage'), what if they split up, what if your mum dies before he does but he wants to continue to live in the house, what are his expectations re bequests to his own children (if he has any).

I wonder if it might not be easier to just send her money to cover the mortgage every month? Although even with this you would need to check how it would affect any benefits they might be receiving.

As to you 'not wasting it', you just have to decide not to waste it. That would probably be the simplest solution of all.

Bazofts_Revenge

I would put a charge on the property. Other posters mentioned you would need to get something from the 'loan' but in this case you would be getting a share of the property. You would need it revaluing and have your % allocating or would you just have your £25000 putting down as a figure you must be given back when the property is finally sold. As a Step father looks to be involved you must protect yourself by having this done properly. Also make sure you are named on the house insurance policy. Should anything untoward happen to it they may only pay out to the policy holder which could become your step father or anyone he chooses to leave his share of the property to.

bowlhead99

reveller wrote: »

Her mortgage payments are roughly equal to her pension of about £200 a month so paying it off would make a big difference to her.

So at the moment she has income of only £2400 a year and has to pay £2400 a year on mortgage. What does she do for heat and light and council tax etc, and clothes and food?

If she currently does not have enough income to live on it sounds like it would make a very big difference for her to suddenly be able to take the £200pm that was going on the mortgage, and spend it on her cost of living. However, would having zero mortgage change or impact any existing levels of benefits such as income support, ESA, pension credit which take into account her mortgage costs? I'm not au fait with the various different schemes.

For me, I would benefit as it would be a sum of money that I can't touch for hopefully at least a few decades so no chance of me wasting it.

In your opening paragraph it sounded like you wanted to gift her some money "I've recently inherited some money and would like to give my mum £25k to pay off her mortgage". So just to clarify, you don't want to 'give' her some money to improve her wealth, only 'lend' her some money to keep the wolf from the door and be able to have it back later if the wolves stop being at the door.

I'm concerned though that unless I set up something formal, if she is her husband need care when they're older, it will be taken by the government to pay for that and then I'll get nothing back.

Well yes, if you give her some money and she spends it on what you want her to spend it on, she will have more money of her own (in the bank account or embedded in the value of the house) to spend on getting the care she needs. You wouldn't have any rights to get anything back.

Some ideas I've had in my head but not researched:

Zero interest lifetime loan.

This is nice for her because zero interest is better than some interest to the bank. And the implication of this solution is that there is no risk of 'default' during the term of the loan because you are not asking her to pay it back at a particular date, only when she dies, if she has enough assets left at the end.

There is still risk of loss from your side because she might decide she needs some expensive and comfortable private care because it's nicer than the grotty council place for the last few years of her life, and so she uses up the value of her house on that sort of expenditure. You would not have a say in the matter because there's no requirement to pay you back until she dies, so she can spend as much as she wants with impunity.

If you want to have a say in how she spends the last of her monies you could put a legal first charge on her house, just like the mortgage company would do. That means that the loan is secured against the house and if it is sold for more than £25k you would get your £25k back in your hand before other creditors and before she gets the chance to spend it on council care or nicer care. You could then give it to her for nice care if you felt sorry that she was going to have to do without nice care (or any care), or you could abandon her and keep it for yourself. That would be a tough choice.

However being interest free over a long timescale creates another potential problem. Let's say she's 55 now and lives to 85, or 60 and lives to 90. That's three decades. Over time, things get more expensive. Let's say every year there is inflation at 3% ish, so £100 only has the buying power of £97 the previous year. After year two, it only has the buying power of £94.09 and so on. After year 30, your £25,000 only has the buying power of £10,025.

So, you can think 'ah don't worry I can get my money back at the end' but you are only getting back £10,025 in real terms from the £25,000 charge on her house. You might've been hoping to spend that £25k on your own retirement but in reality have lost 60% of your money to inflation.

So, you might anticipate that situation and decide you would charge enough interest at the end to cover RPI or whatever inflation measure you pick. So the actual bill charged to her after 30 years when she is dead or selling the house, could be £62,343 which worked back at that same £10,025 to £25,000 ratio would only be £25,000 in real terms. So you haven't lost out. And she hasn't really lost out because the long term interest rate on a mortgage might have been about that rate anyway (even though it's lower at the moment), and her cashflow situation was much improved because she didn't need to pay you anything week in week out, so she got a better standard of living for those three decades.

But the problem with charging her £62343 to pay off the £25,000 loan principal is that there is over £37k of interest. So in that year when the loan is settled together with interest you will be paying a big chunk of tax. There is no exemption from paying HMRC tax on your interest income just because it came from family. So you still wouldn't get back your £25k in real terms, because of the significant tax cost, and the only way to cover that is to charge even *more* interest...

You might think you could somehow try to work around that by saying the extra £37k is not interest, merely a 'gift' from a loving parent which is coincidentally being paid the same time as a £25k gift from the loving parent which coincidentally matches the £25k gift that you had made to her some decades previously. But apart from being an obvious sham in terms of disguising the interest payments, the idea that she might like to give you a big gift if she can afford it, gives you no legal rights over anyone else when the house is being sold to pay for care or credit card companies or debt collectors or whatever.

Use the money to buy a relative share in the house

She might not mind selling you a slice of the house to fix her cashflow problem, and then your cash is 'tied up in' the house value. As it would not be a formal loan agreement, just equity ownership, you could never get it back no matter how desperate your own financial circumstances, without selling the house. If she dies or moves into a home you are then perhaps just a part-owner along with her husband or whomever inherits the other share that your £25k didn't buy. He might live another decade or two and you might not want to force a sale.

When you do eventually get her/them out of the house and sell it and take your proportionate share in ten or twenty or thirty years, you will quite possibly have capital gains tax to pay because you're selling an investment property that's not your main residence.

Some sort of trust?

I'm assuming from question in general and the vague suggestion of 'some sort of trust' you are not a trusts and estate planning specialist ; you have just heard that sometimes people use trusts as legal solutions to complex financial or tax planning problems. So, you'd need specialist legal advice beyond the scope of any answers or pointers you could possibly get here on a public forum, and it would cost to set up, in addition to the independent advice about what to set up.

I'd be keen to get some ideas. I'm thinking this way not just because it would be nice to get the money back but because I don't think my mum would accept the money outright as she'd rather see me financially secure so I think doing something like this would help both of us.

Lending money to family can be just as complicated and fraught with practical and emotional problems (even more so) than giving an outright gift to a proud family member who doesn't want to accept charity.

You get them to accept it is not charity, but then they still feel it is a bit charity and are guilty that you helped them and they owe you, (and legally they do); and then maybe they modify their behaviour to buy supermarket-brand baked beans which they don't like as much as Heinz so they can make sure they can afford to pay you back; and then they have a lower quality of life because they are eating beans they don't like.

And they are eating the beans they don't like because they feel guilty about accepting your money, and they feel that letting you down would be emotionally even worse than letting the bank down and having the house repossessed.

And when it's finally time to look at care homes for the last few years of their life, and there is a choice of getting a nice one or a nasty one, they have to make the active decision to choose the nasty one so that you can get your money out - which they may willingly do but quietly resent you for the rest of their days depending on their emotional state - whereas if they had never taken your money they would just have the default option offered by the council based on the lower sums of money available embedded in their house value.

So, this kind of stuff is fraught with potential problems. The way forward is a very open and candid discussion with your mum. Before that, you need to decide exactly how much of the £25k you want or need back (bearing in mind the '£25k in three decades is only worth £10k' point mentioned earlier). If you could make do with less than the full £25k to be returned, you could perhaps compromise with her and just give her an outright gift of half the money, halving her monthly mortgage costs and making her better off, without entirely solving her and her husband's problems, and letting them find their own solution to the rest of their joint cashflow needs.

trailingspouse wrote: »

As to you 'not wasting it', you just have to decide not to waste it. That would probably be the simplest solution of all.

Yes, true. Save or invest it wisely as you go about your daily business and you will have a nice little nest egg or emergency fund which you can use to treat her, help her out, or eventually fund a year in a nicer care home, at some point down the line.

xylophone

Rather than getting into all the palaver,how about simply giving your mother £5000 and putting the rest into a stocks and shares ISA for yourself?

Your mother might open a Nationwide Flexdirect and a Flexclusive regular saver and take advantage of the 5% interest rate - at the end of the year she might use the cash to pay off a chunk of mortgage, fund two years' mortgage payments etc.

As a kind and loving daughter you would have made a generous gesture which should delight your mother rather than making her feel under any kind of obligation/involving her in legalities.

Mojisola

reveller wrote: »

I'm concerned though that unless I set up something formal, if she is her husband need care when they're older, it will be taken by the government to pay for that and then I'll get nothing back.

Some ideas I've had in my head but not researched:

Zero interest lifetime loan.
Use the money to buy a relative share in the house
Some sort of trust?

The easiest thing is a loan. Get it all drawn up officially and put a charge on the house - that way, your money will be paid back first before any can be spent on care.

londonlydia

Hi,

I've thought about doing this myself, as I am wealthier than my mum and stepdad.

Although I haven't pursued it yet, I believe what you need to do is get a solicitor to rustle up a deed of trust that states that you own £25k of the house, and upon sale, you either (a) get this £25k back, or (b) get the % of the house value that £25k is equivalent to.
When I had a house with an ex a few years ago, this is what protected money that was given to us towards the deposit by my partner's father. Getting the deed of trust was a few hundred pounds, but relative to the money in the house, it was worth it.

reveller

Thanks for the great replies. There's nothing like complete strangers to give you some different points of view. I'll have another read through when I'm less tired tomorrow.

Mojisola

reveller wrote: »

I've recently inherited some money and would like to give my mum £25k to pay off her mortgage

I'm concerned though that unless I set up something formal, if she is her husband need care when they're older, it will be taken by the government to pay for that and then I'll get nothing back.

Another thing to consider - if your Mum dies first, she could leave half of the house to her husband and half to you (giving him the right to stay in the house so you don't actually inherit until after he dies or leaves the house).

If she has put him on the deeds as an owner, they could own it as 50/50 tenants in common and she could leave her half to you.

If he needs to go into care, only his half will be counted.

If either of them needs care while the other is living at home, the value of the house isn't counted at all.