Loan to relative and partner to help buy first house / flat and how to approach any agreements.

wizzards

I have a relative nephew who is self employed and successful and living with a partner.  As a couple they would like me to help them out with a personal loan to buy their first property in an up and coming area of Manchester.    I am not mad on the idea but am open to consider it.   I am not sure quite how to go about it. How to put it on a formal basis and if I should ask them for some interest at least to inflation proof it and how much and if I got some token interest would I have to pay tax on it ?    I assume I should consult a solicitor and ensure there is a charge on the property in any agreement.  Obviously they would get any balance on top of anything I loan them from a normal bank who would also have a charge on the property.   Does anyone have experience of lending cash to relatives.   

Also if they are jointly buying the property taking a worst case scenario if they split up for any reason and had to sell the property how would that leave me.
I am not keen on making it a gift as my nephew is doing quite OK financially.   The main challenge he has is banks are not so friendly to self employed persons in the current climate even though his income is sufficient to cover the loan (I have yet to check this in detail) amd he has plenty of work.

MinuteNoodles

If you mean to lend them the money as a deposit then with the vast majority of lenders it's not happening. Lenders do not like you getting a loan for a deposit and when we helped our son out we had to sign a letter stating that the money was a gift, was not repayable and we would have no interest in the property.

There is just one exception I'm aware of, the Barclays Family Springboard Mortgage.

https://www.barclays.co.uk/mortgages/family-springboard-mortgage/

This would allow you to contribute 10% of the price, you'd have security on the mortgage and after 5 years you'd be repaid with interest. However being your nephew is self employed might make it harder to get one but this would depend on how things are going.

wizzards

They probably can put down 10% -15 % from their own savings for a purchase price of £140K

Thrugelmir

The first charge lender is unlikely to grant you a second charge on the property.

The money advanced by you will have to be certified as a gift. Effectively negating any side agreement that you may have drawn up from a legal perspective. . 

wizzards

If I gave a gift then there is a £3000 limit ?   Could I just buy the house outright and let them buy it back from me at a lower rate than the bank.

Thrugelmir

wizzards said:

  Could I just buy the house outright and let them buy it back from me at a lower rate than the bank.

You could. Though family and money rarely mix well. Many potential outcomes. Not just with your nephew but his partner. 

noh

wizzards said:

If I gave a gift then there is a £3000 limit ?   Could I just buy the house outright and let them buy it back from me at a lower rate than the bank.

You could arrange a private mortgage here Is a previous thread. There have been others. 
https://forums.moneysavingexpert.com/discussion/5133888/private-mortgage/p1

wizzards

Thrugelmir said:

wizzards said:

  Could I just buy the house outright and let them buy it back from me at a lower rate than the bank.

You could. Though family and money rarely mix well. Many potential outcomes. Not just with your nephew but his partner. 

This is one of my worries.  Its not my nephew that I worry about its my brother.  He seems to be the one approaching me.  My view is if my nephew wants something he can approach me directly then I will have any facts straight from him.   I do not know my nephews current partner so well but his first partner ran off with some customer she met in the cake shop she worked in.  Since then his new partner and him have been happy for 4-5 years of more now.
If its an outright loan I would want to know all the details such as income outstanding loans from them as a couple.   I just did a rough calculation if they got a loan for say 140-150K they would be paying back about £700 a month which is kind of the max an average couple might want to tie up in a mortgage over say 25 years. 
These days if you gift someone something a thats large amount it gets taxed.  If you try to loan someone money and there is a bank involved you have no rights over the loan.  All in all it seems not the best thing to do however much you think you would like to help.

upsidedownpancake

wizzards said:

Thrugelmir said:

wizzards said:

  Could I just buy the house outright and let them buy it back from me at a lower rate than the bank.

You could. Though family and money rarely mix well. Many potential outcomes. Not just with your nephew but his partner. 

These days if you gift someone something a thats large amount it gets taxed.  If you try to loan someone money and there is a bank involved you have no rights over the loan.  All in all it seems not the best thing to do however much you think you would like to help.

No, it doesn't.  If you were to die within 7 years they'd have to pay Inheritance Tax but there is no tax on gifts, otherwise, everyone would have to fill out a tax return if their gran stuck £20 in their birthday card.

The banks just want to avoid the legal hassle of you claiming that you have rights over the property.  Either you give them the money unconditionally or you don't. It's your choice.  But banks are not going to start fannying around with the complexities of you getting involved in the whole equation if things go awry, it's not at all worth the time or money.

normanna

wizzards
I personally wouldn't lend the money via a private mortgage or other.  Your nephew you say earns decent money and is self employed and you say he has enough money to pay a mortgage.  Along with many others who are self employed or employed and have found the mortgage market to have tightened then he should continue to save for a larger deposit to be more appealing for a Bank to lend.  Banks still are lending to self employed by the way.  

How are you going to feel if he loses his job or falls into financial difficulty.  What happens when he wants to move and doesn't have equity.  The partner will have a beneficial interest in the property and they may separate.  there are many more potential pitfalls to mention ere.  You may be pressured into giving him mortgage payment holidays etc otherwise you could be made to feel terrible by your family and you'll feel guilty about taking action.  

By all means give him advice and perhaps gift him something to help with a deposit but I'd be asking first how much deposit he has, as if he's not saved anything or very little then he's showed no effort and I wouldn't go ahead with any gift.  

As many others have said money and family rarely mix well.  I would politely say no and wish him well with his savings.  

bradders1983

wizzards said:

They probably can put down 10% -15 % from their own savings for a purchase price of £140K

If they can manage 15% they wouldnt need your help at all.