Borrowing from Parents instead of Bank

dgerrard

Wife and I are nearly there on buying our first home.

Buying a £350k home, have a £45k deposit.

Both sets of parents have said they'd be happy to help us in the past, looking like around £40k per family.

They would expect it paid back, but without any interest.

From looking online, the advice ranges from saying it's as simple as a bank transfer from them to us, to needing legal advice to ensure there are no taxes or fees to the tune of thousands of pounds.

Any advice, or a link to a good resource to learn more about this subejct?

Thank you!

davidmcn

dgerrard wrote: »

Buying a £350k home, have a £45k deposit.

Both sets of parents have said they'd be happy to help us in the past, looking like around £40k per family.

Ok, but that only gets you to £125k. Where's the rest coming from, given you said "instead of bank"? If you are in fact also borrowing from a bank, they generally take a dim view of you borrowing from elsewhere as well.

AdrianC

OK, so that's £45k + £40k + £40k = £125k. Yes, it is as simple as them transferring £40k to your account. If they want anything in writing, then they can specify to what level of legal enforceability their trust in you doesn't extend... It's nothing to do with the tax man.

You're still going to need a £225k mortgage - but will need to declare to the lender that you have borrowed £80k of the equity from family, rather than it being your own. Don't try to bluff it as a "gift", because it isn't.

00ec25

dgerrard wrote: »

From looking online, the advice ranges from saying it's as simple as a bank transfer from them to us, to needing legal advice to ensure there are no taxes or fees to the tune of thousands of pounds.

you have been looking in the wrong places then

Tax
no taxes payable by you or parents.
you say the money would be classed as a repayable loan so that should be documented in case of parental death as the loan would form part of their estate for inheritance tax purposes. Whether either parent actually has an estate large enough to be liable to IHT is not something you have even hinted at, so probably not an issue.

documentation
the fact it is a loan should be written down
does not need legal advice to do that but should list some obvious things:
- no interest payable
- basis of repayment eg: £x pcm for x years
- what happens when you sell the property
- what happens when parents need the money back "early" (eg they go into a care home or suffer a catastrophe)

your mortgage
it is a loan therefore it will need to be declared as such to whoever is your own lender and your lender will take that into account when assessing your affordability and how much they will lend you. Don't lie, if you say it is a gift them the lender will ask your parents to sign a document stating it is a non repayable gift. Of course your parents may have a different moral compass and be happy to lie in such a circumstance, but there really is no need for that.

dgerrard

Hi All,

Sorry, should have been more clear:

This would be in addition to a mortgage, for whatever amount was left.

As AdrianC mentioned, we'd have £45k + £40k + £40k = £125k, so mortgage for £225k.

So it sounds like from your comments, that it is fine to do, so long as we get the particulars in writing and declare it to the bank + our financial advisor when the time comes.

We're already approved for a £425k mortgage: is there any way that we would be approved for this, but NOT after we take this loan from our parents?

Could this potentially have any impact on the rates they'll give us on the mortgage?

letitbe90

dgerrard wrote: »

Wife and I are nearly there on buying our first home.

Buying a £350k home, have a £45k deposit.

Both sets of parents have said they'd be happy to help us in the past, looking like around £40k per family.

They would expect it paid back, but without any interest.

From looking online, the advice ranges from saying it's as simple as a bank transfer from them to us, to needing legal advice to ensure there are no taxes or fees to the tune of thousands of pounds.

Any advice, or a link to a good resource to learn more about this subejct?

Thank you!

If you are getting money from your parents, they will not accept them if they are loans, as then they will all have an interest in the property, which is detrimental to the bank. They would generally have to sign a paper to say it is a gift and it is not repayable and they have no interest in the property (and will likely have to provide financial statements to show how the amount was allocated).

davidmcn

dgerrard wrote: »

We're already approved for a £425k mortgage: is there any way that we would be approved for this, but NOT after we take this loan from our parents?

Yes, because the bank will treat any other borrowing you have as a financial commitment by you. You say the parents want it paid back - do you mean by way of regular payments, or only when you sell?

If either/both sets of parents want to protect their interests properly then they might want to register a charge over the property - and (in England & Wales anyway) that would require the consent of the first chargeholder (i.e. the bank), which might not be forthcoming.

AdrianC

If they've given you an AiP for £425k, I can't see £225k with £80k of borrowed equity being a big issue.

Even just the £45k of your own equity gives you a total LtV within 90%, with their exposure under 65%.

dgerrard

Hmm, a good question.

Initially it was just going to be a gift towards the deposit, but we didn't feel comfortable taking that much money from them so we talking about it being a loan.

These responses are making me think now: would that just be the more straightforward option, just to have it as a gift with no structured payback set up? And then if we DO pay them back in the future, treat that like a gift as well?

letitbe90

You have no option but to declare it as a gift, they won’t give you a mortgage if they believe your family members have loaned it to you.

eddddy

dgerrard wrote: »

These responses are making me think now: would that just be the more straightforward option, just to have it as a gift with no structured payback set up? And then if we DO pay them back in the future, treat that like a gift as well?

Yes - and the parents would probably have to sign a document confirming it's a gift.

And you are free to give the parents a gift (of an equal or different amount) at some point in the future.

But obviously, if you choose not to give the parents a gift in the future, they have no way of forcing you to do so.

(It would only get complicated if something happened like a parent died in the next 7 years, or is insolvent, or needs to go into care.)