Private Mortgage vs Private Loan

uglistix

I'm considering offering a private mortgage to a family member, but i'm wondering whether it should be constructed as a private mortgage or a private loan. Are private mortgages even possible in the heavily regulated world we live in today? The main thing is that I want to make sure it's all official and above board and that there is a charge against the property as a normal mortgage provider would have. Clearly there will be tax implications for me in that I will need to declare the interest received as income.

Ultimately I will be getting a solicitor to draw up all the documents, but I always like to do as much research as possible before calling in on the experts!

I know that there'll be some questions/advice about why I'm lending to family and the perils of doing so... so let me just make a few points here:

• Although I'd obviously prefer to get the money back at some point (25 yrs) down the line, I'm fully prepared to write it off.
• Having said that I'm prepared to write it off, I don't want the borrowers to know that. I want them to consider this as a standard mortgage/loan that needs repaying
• I don't want to just gift it. I wold hope that being <40 I'm less likely to fall foul of the 7 year IHT rule, but my main point is that I don't want this to be a "hand-out"
• This family member can't quite get the mortgage level they want from a traditional lender. This is because they have the double whammy of being self employed and having NO credit history whatsoever. They have always shied away from any form of debt, working on the good ethic to save to buy something... so no phone contracts, no car leasing/contracts, no credit cards, etc.
• I've seen their business go from strength to strength over the last 5 years and (perhaps blinded by family-tinted glasses) I have confidence that it will continue to do so. Clearly I don't have a crystal ball, but I'm willing to back this family member (funnily enough, I wouldn't back any of my other family in the same way!)
• Being self employed, they also have a lower annual income after being legitimately tax efficient.

As a final note - one other option I considered was loaning just the part to make up the difference between the traditional mortgage they have been offered and the value of the property. However, my understanding is that unless this is a gift (which I don't want to do, see above reasoning) then most, if not all, lenders would factor this in and reduce the lendable amount accordingly.... hence negating the help!

Thanks in advance for any insight you can offer!

ACG

A mortgage is just a loan secured against land/property in essence.

So you would need to do a Mortgage if you want it secured. Speak to a solicitor who will write something up. I think the bigger issue would be if you were charging interest, but with it being a one off Mortgage to a relative you may not be bound by the same rules as a normal lender.

On a side note, no credit history and self employed is not a deal breaker in getting a Mortgage. There are lenders who will lend around 4.5x the latest years income (either wages + dividends or wages + net profit) and there are also lenders who will not credit score the applicants. Your relative will have a bank account presumably? They may also have utility bills if renting maybe?

Thrugelmir

uglistix wrote: »

but i'm wondering whether it should be constructed as a private mortgage or a private loan.

Both are identical. Other than the charge, a mortgage , is placed on the property to secure the debt.

While your offer is extremely generous. How much more are proposing to lend them then lenders regard as affordable. Stretching their finances may not actually be doing them any favours.

Being self employed, they also have a lower annual income after being legitimately tax efficient.

Doesn't make a larger debt any more affordable. While self employment can be rewarding doesn't come with the same benefits that many employed people enjoy.

uglistix

Thanks both.

Stretching their finances may not actually be doing them any favours

This is my main concern. The last thing I’d want to do is help them over stretch themselves. At the moment they are already paying rent that would be equivalent to a repayment mortgage at 3%. I think this is what irks them - they’ve demonstrated being able to afford this for several years.

I’d be offering it at 1.5% fixed for 3 years, and refix at a new rate every 3 years thereafter.

Maybe I’m being too generous, but I’m in an incredibly fortunate position and my family member isn’t. Sure, I could gift it.... but they’d have way too much pride to take a hand out (and rightfully so!). I can’t take it with me (as the saying goes!), I don’t have expensive tastes or big spending habits, and i just think: what good is it sat there when it can help someone close to me.

davidmcn

uglistix wrote: »

Are private mortgages even possible in the heavily regulated world we live in today?

Just to answer this point - yes, there is no regulation unless you are lending in the course of a business.

getmore4less

Given what you have said about potentially converting to a gift at some point in the future.

Is 1.5% worth bothering with after tax?