Brother buying a house for me

Mattchoo

Hi all,

Hoping for some advice.
My wife and I have 5 kids and currently rent. We tried for a mortgage at the end of 2019 - we only had 2 real options (my wife has small default from 2016 and we're in northern ireland). Basically we passed everything but underwriter thought we might struggle if interest rates went up, but try again in 6 months if we can put money aside each month. Fair enough I suppose.

We tried the second option and it failed on credit score (between first application and second application) - I had 2 missed payments (For 1 x £9 annual recurring transaction) for a credit card I had a zero balance on and did not use/Had no intention of using - silly. So anyway, mortgage broker now says we will have to wait 12 months to apply again.

We have found another house in a perfect location and due to a lot of circumstances (including being very isolated far from family and our kids school situation) it would be incredibly difficult for us to wait that long. 

My brother has offered to buy the house for us and then rent it to us for the monthly cost of the mortgage. He is not in a relationship and doesn't have any kids right now but would have a very good income. He currently has a small mortgage left on a house already so this would be a second property for him. 

We have the deposit (gifted from parents) and I know we would be subject to the additional stamp duty as it would be his second home.

If he bought the house and we paid him the mortgage would there be any other concerns we should consider?

If we wanted to take on the mortgage in a year or 2 years time would we need another deposit again?

Are there any issues that it won't be his main residence?
Anything else?
Thanks,
Mattchoo

Tom99

What about if your brother loaned you the money? That will avoid additional stamp duty and when you are able to get a mortgage elsewhere you can pay him back?

AdrianC

Mattchoo said:

My wife and I have 5 kids and currently rent. We tried for a mortgage at the end of 2019 - we only had 2 real options (my wife has small default from 2016 and we're in northern ireland). Basically we passed everything but underwriter thought we might struggle if interest rates went up, but try again in 6 months if we can put money aside each month.
...
We tried the second option and it failed on credit score (between first application and second application) - I had 2 missed payments (For 1 x £9 annual recurring transaction) for a credit card I had a zero balance on and did not use/Had no intention of using - silly. So anyway, mortgage broker now says we will have to wait 12 months to apply again.
...
My brother has offered to buy the house for us and then rent it to us for the monthly cost of the mortgage. He is not in a relationship and doesn't have any kids right now but would have a very good income. He currently has a small mortgage left on a house already so this would be a second property for him. 

We have the deposit (gifted from parents) and I know we would be subject to the additional stamp duty as it would be his second home.

If he bought the house and we paid him the mortgage would there be any other concerns we should consider?

If we wanted to take on the mortgage in a year or 2 years time would we need another deposit again?

He will be your landlord, with all the legal responsibilities and requirements that entails.

Will he be able to get a BtL mortgage, with his equity having been borrowed from you? Unlikely. It might make more sense for him to extend the mortgage on his main home. And, yes, he would need to pay the additional property SDLT - because he's buying an additional property... Nothing to do with whether he has a mortgage on his existing property.

You could buy the place from him in a few years, yes, and I'd presume he'd be repaying the equity that he borrowed from you, so you'd have sufficient equity to not need a 100% mortgage. You wouldn't need the 10% exchange-of-contract security deposit, because the transaction is between related parties.

But let's go back to your mortgage applications... If you "passed" all the lender's tests, but the broker was nervous about affordability, that sounds like they were being very cautious - you could always ignore them and take the mortgage. Or did you fail the lender's affordability tests?

There is no minimum requirement to wait for a period between applications - perhaps the broker's simply explaining that you aren't going to find a lender now, but may once your finances have improved? The card may seem like a trivial issue to you, but in a borderline application, it shows somebody who isn't on top of their finances - I'm surprised it didn't get covered by the repayment DD on the card, even if it was a minimum repayment...?

Mattchoo

Thanks for reply. The underwriter at rhe lender turned down our application because of the possible interest rates going up, not the broker. So lost on affordability.

 I did mean it was silly of me to miss the payments, not trivial that I was rejected on that basis I didn't have a DD setup, always paid it off with normal bill payment each month.

Our lending options won't allow 2 missed payments within a 12 month period so that's why we have to wait to apply again.

My plan was to send the deposit back to my parents who could then give it to my brother, though the other way might be an option too, or he might have that money and we could replace it with the deposit we have. Though I would leave it up to him to see what is best for him too.

I know we/He would pay the extra stamp duty but in terms of location, area, price size etc, the house is perfect for our large family, so if we can even negotiate the price down it could definately be worth it.

Thanks
Mattchoo

Mattchoo

@Tom99 Do you mean lend us the entire value of house? 

Anna1912

It is complicated and getting your brother involved makes it worst.

The best variant would be to have your brother on the mortgage as joint tenants and then when you have better score - become tenants in common and buy 1% off but it would br better to have a solicitor involved to write things on a piece of paper

yksi

If he lent you some extra money for a larger deposit, your repayments would be lower so you'd have less hassle with the affordability checks (assuming that you are sure you can afford repayments plus repaying your brother). All things considered though, if you are struggling to keep your head above water already, you need to remember that an interest rate increase might leave you at risk of losing your home - so you should probably reconsider this home completely and opt for something less expensive. Buy smaller and stick a conservatory on, etc. You can always upsize in a few years' time.

ACG

Higher rate stamp duty, he would also have to pay income tax on the rental income after costs (which does not include interest) so he will effectively be losing 20% (or 40% if he is or becomes a higher rate tax payer), you then have a gifted deposit which is going to be an issue in itself as it could look like the gift has come from you to your parents to your brother in order to buy you a home. 
This will need a LOT of work upfront to have a chance of moving forward and there are a lot of potential issues. If everyone is happy with an intrusive underwriter/solicitor and is aware of the tax implications it can probably be done but I think you need to be prepared for what will be involved as it wont be a straight forward application. 

Mattchoo

Hey yksi - I should have mentioned this house is different than the one we applied for (and current sell price is almost £20,000 cheaper than the original house).

Larger deposit wouldn't help as my stupidity with the missed payments means we have to wait a year to even apply.

Should also say the area is very high demand. We have been looking for 3 years and only seen 3 suitable/within our general price range so wait a year and we might have to wait much longer.

Mattchoo

Thanks @ACG The extra tax could be a serious problem for making this a viable option.  I'll maybe speak to my brother and see if he can get advice from his accountant on this.

Thanks for your answers, I guess I knew it wasn't going to be simple.

davidmcn

Mattchoo said:

My plan was to send the deposit back to my parents who could then give it to my brother

Do you mean to help him fraudulently hide the real source of the money? The solicitors will check where it actually came from, so this is unlikely to help any.