Second mortgage and use of equity....

theartfullodger

wallas74 said:

The property was the family home, I bought it eleven years ago and my mother lives in it, I pay the mortgage. 

The lender does not know I haven’t been resident there the last year. 

Assuming your mortgage conditions require you to be resident there & not renting to or permitting close relatives to live there instead..... in which case you'll be breaching mortgage contract conditions.

Oh yes they very likely do know.  From the "Hunter" system that lenders (not just mortgages) use to track cheats breaking contract conditions.  And if you're on there very likely any new mortgage will be expensive/impossible, also any other loans or credit agreements (eg mobile 'phone contracts).  See...

https://www.theguardian.com/money/2008/nov/15/national-hunter-credit-agency

&

https://www.nhunter.co.uk/

Lenders aren't always stupid and this sort of activity is well known to them, and tracked.

Plus of course your other 4 debts history going back to 2013....

https://forums.moneysavingexpert.com/discussion/5985846/f-f-settlement-advice-please#latest

wallas74

DairyQueen said:

Buying a parent's home is fraught with difficulty. The standard advice is: 'don't do it'. HMRC and local authorities are wise to how this has been used as a method of avoiding tax and/or claiming state-funded benefits such as care home fees. The consequences of walking blindly into this financial trap can be serious regardless of whether the motives are well-meaning/innocent.

For you:
- were you a FTB when you bought mum's home? If so, you have now foregone those benefits
- you must pay extra SDLT when purchasing a second property
- you will be liable for CGT on disposal of mum's home as it will not be your primary residence from (officially) the date you purchase the second property
- you will not be able to apply for a standard (i.e. primary residence) mortgage on the home you now wish to buy unless you convert the mortgage on mum's home but...
- you cannot convert the mortgage to, for example, a standard BTL as property occupied by family members is usually excluded and, especially, if occupant is not paying rent
- you could deceive your current mortgagor (not recommended) by applying for a second mortgage on mum's home (if you still claim it as your home) in order to release equity for the second property. However, this would still cause issues with the subsequent mortgage application on property 2 as you cannot have a standard, residential mortgage on two properties concurrently. Finance company would immediately smell a large rat
- if you die mum's home will form part of your estate for IHT calculation
- if you marry and subsequently die/divorce, mum's home will be included in the assets for division on divorce or allocation to heirs/spouse.

For mum:
- if she requires residential care in the future, she will be open to a claim of 'deprivation of assets' if she sold the house to you for less than market value. Did you pay her the full value of her then equity? If not, the LA will treat any equity 'gift' to you as still within her estate and she will be means-tested accordingly. She cannot avoid paying for her own care by gifting all/part of her house
- mum has now foregone the additional IHT relief available for primary residence on death. This is worth £175k if a primary residence is bequeathed to a direct descendant, and possibly double that if your mother is widowed and late husband's allowance was not used on his death
- as mum is not paying rent she has retained beneficial interest in her home and it will still be included in her estate for IHT purposes.

You are now in a difficult situation as you are effectively encumbered by mum's property and this will be a permanent constraint on your finances/life plans.

A possible way forward is for you to continue to claim mum's home as your primary residence. This would require your GF to purchase the new property in her sole name (assuming she can raise sufficient mortgage to do so) but you could contribute toward the deposit (including by extending the mortgage on mum's home). You could then protect your financial interest in GF's home via a 'Declaration of Trust'. There are issues with this approach (including if you/GF marry/split/die) so a solicitor's advice should be sought and s/he should prepare the paperwork - including wills.

Thank you for your reply and the in depth knowledge you've given me here.  It's a lot to take in. I'm not sure what "FTB" means? 

So i bought the house in 2008, my parents were getting advice on selling the house to a company that would give them a lump sum and then let them live in it for the rest of time, i'm not quite sure on the full details now, but they weren't convinced by it and it seemed a little dodgy to them.  When i found out i wondered if i could help, i didn't have a property of my own and and with talks with the family i decided to go and speak to a mortgage broker and see if could buy.  I'll try and keep this brief.
So i bought it for less than market value but i'm sure it was all above board as the broker was keen to make sure everything was legal and there was no problems moving forward.  When i bought the house my parents had no mortgage, it was already paid off.  
I know this was probably a big mistake of to buy the house, i wanted to help my parents out and make their retirement easier and they wanted to keep the house in the family. I've found it tough over the years to pay my mortgage and live my own life and times have been tough.  I took a 30% paycut from a previous job and only since i managed to get a new job in 2018 with a higher wage have things become a little easier.  The house has always been my primary residence, i've always lived there, up until March 2020 when COVID hit and i decided to move out to enable myself to keep working and keeping my Mother safe (she's 80, my father had passed away 8 years before) and i moved in with my girlfriend.  We've been renting since June/July and i've been paying the mortgage on the house and my rent in our new place.
I originally posted my question as we are thinking about moving forward and hoping to start something new and i wanted to know if there was a way i could make it work.

I really appreciate your reply and any advice about what i should be thinking about doing regarding the house my Mum lives in, she doesn't have a pot of money sitting in the bank, my Dad had a small pension and my Mum gets by.  I don't want her to worry about how the future may pan out and she's always felt guilty about me purchasing the house and putting my life on hold a little.  We are very close and i want her to live a happy stress free life.  At the time we obviously didn't take enough advice from people and i didn't think it through properly and it's been a burden hanging around my neck for a long time.  I'd hoped with getting a new job with an improved wage i'd be able to move forward but it feels like i'm being pulled back and this house in the future could be very problematic.  
Would you suggest i get some legal advice on what may happen ? 

Thanks again.

wallas74

theartfullodger said:

wallas74 said:

The property was the family home, I bought it eleven years ago and my mother lives in it, I pay the mortgage. 

The lender does not know I haven’t been resident there the last year. 

Assuming your mortgage conditions require you to be resident there & not renting to or permitting close relatives to live there instead..... in which case you'll be breaching mortgage contract conditions.

Oh yes they very likely do know.  From the "Hunter" system that lenders (not just mortgages) use to track cheats breaking contract conditions.  And if you're on there very likely any new mortgage will be expensive/impossible, also any other loans or credit agreements (eg mobile 'phone contracts).  See...

https://www.theguardian.com/money/2008/nov/15/national-hunter-credit-agency

&

https://www.nhunter.co.uk/

Lenders aren't always stupid and this sort of activity is well known to them, and tracked.

Plus of course your other 4 debts history going back to 2013....

https://forums.moneysavingexpert.com/discussion/5985846/f-f-settlement-advice-please#latest

Thanks for your input.  I've replied to another post explaining my situation.  I think dropping the word "cheat" in was a little harsh, and bringing up my previous debts that i have hanging over me and i'm trying to put right is a little off. I've lived in that house since i bought it in 2008 and only moved out because of COVID last March 2020, where i couldn't safely continue to work and live in my house with my 80 yr old mother.   I've come here for a little bit of advice from people like yourself who has more knowledge of such matters and maybe a little bit of empathy in such tough times.  I'm not here to cheat people or businesses and i'm trying to do my best for those closest to me.
I appreciate any advice you can offer me, thank you.

DairyQueen

wallas74 said:

DairyQueen said:

Buying a parent's home is fraught with difficulty. The standard advice is: 'don't do it'. HMRC and local authorities are wise to how this has been used as a method of avoiding tax and/or claiming state-funded benefits such as care home fees. The consequences of walking blindly into this financial trap can be serious regardless of whether the motives are well-meaning/innocent.

For you:
- were you a FTB when you bought mum's home? If so, you have now foregone those benefits
- you must pay extra SDLT when purchasing a second property
- you will be liable for CGT on disposal of mum's home as it will not be your primary residence from (officially) the date you purchase the second property
- you will not be able to apply for a standard (i.e. primary residence) mortgage on the home you now wish to buy unless you convert the mortgage on mum's home but...
- you cannot convert the mortgage to, for example, a standard BTL as property occupied by family members is usually excluded and, especially, if occupant is not paying rent
- you could deceive your current mortgagor (not recommended) by applying for a second mortgage on mum's home (if you still claim it as your home) in order to release equity for the second property. However, this would still cause issues with the subsequent mortgage application on property 2 as you cannot have a standard, residential mortgage on two properties concurrently. Finance company would immediately smell a large rat
- if you die mum's home will form part of your estate for IHT calculation
- if you marry and subsequently die/divorce, mum's home will be included in the assets for division on divorce or allocation to heirs/spouse.

For mum:
- if she requires residential care in the future, she will be open to a claim of 'deprivation of assets' if she sold the house to you for less than market value. Did you pay her the full value of her then equity? If not, the LA will treat any equity 'gift' to you as still within her estate and she will be means-tested accordingly. She cannot avoid paying for her own care by gifting all/part of her house
- mum has now foregone the additional IHT relief available for primary residence on death. This is worth £175k if a primary residence is bequeathed to a direct descendant, and possibly double that if your mother is widowed and late husband's allowance was not used on his death
- as mum is not paying rent she has retained beneficial interest in her home and it will still be included in her estate for IHT purposes.

You are now in a difficult situation as you are effectively encumbered by mum's property and this will be a permanent constraint on your finances/life plans.

A possible way forward is for you to continue to claim mum's home as your primary residence. This would require your GF to purchase the new property in her sole name (assuming she can raise sufficient mortgage to do so) but you could contribute toward the deposit (including by extending the mortgage on mum's home). You could then protect your financial interest in GF's home via a 'Declaration of Trust'. There are issues with this approach (including if you/GF marry/split/die) so a solicitor's advice should be sought and s/he should prepare the paperwork - including wills.

Thank you for your reply and the in depth knowledge you've given me here.  It's a lot to take in. I'm not sure what "FTB" means? 

So i bought the house in 2008, my parents were getting advice on selling the house to a company that would give them a lump sum and then let them live in it for the rest of time, i'm not quite sure on the full details now, but they weren't convinced by it and it seemed a little dodgy to them.  When i found out i wondered if i could help, i didn't have a property of my own and and with talks with the family i decided to go and speak to a mortgage broker and see if could buy.  I'll try and keep this brief.
So i bought it for less than market value but i'm sure it was all above board as the broker was keen to make sure everything was legal and there was no problems moving forward.  When i bought the house my parents had no mortgage, it was already paid off.  
I know this was probably a big mistake of to buy the house, i wanted to help my parents out and make their retirement easier and they wanted to keep the house in the family. I've found it tough over the years to pay my mortgage and live my own life and times have been tough.  I took a 30% paycut from a previous job and only since i managed to get a new job in 2018 with a higher wage have things become a little easier.  The house has always been my primary residence, i've always lived there, up until March 2020 when COVID hit and i decided to move out to enable myself to keep working and keeping my Mother safe (she's 80, my father had passed away 8 years before) and i moved in with my girlfriend.  We've been renting since June/July and i've been paying the mortgage on the house and my rent in our new place.
I originally posted my question as we are thinking about moving forward and hoping to start something new and i wanted to know if there was a way i could make it work.

I really appreciate your reply and any advice about what i should be thinking about doing regarding the house my Mum lives in, she doesn't have a pot of money sitting in the bank, my Dad had a small pension and my Mum gets by.  I don't want her to worry about how the future may pan out and she's always felt guilty about me purchasing the house and putting my life on hold a little.  We are very close and i want her to live a happy stress free life.  At the time we obviously didn't take enough advice from people and i didn't think it through properly and it's been a burden hanging around my neck for a long time.  I'd hoped with getting a new job with an improved wage i'd be able to move forward but it feels like i'm being pulled back and this house in the future could be very problematic.  
Would you suggest i get some legal advice on what may happen ? 

Thanks again.

FTB = First Time Buyer.

It looks like you were a FTB at the time you purchased parents' home but, alas, no longer.

From your other posts, I suspected that (unusually) you were well-intentioned rather than attempting to cheat the tax/benefits systems. I think this falls under the heading: 'never a good deed goes unpunished'. In the past, I have also considered investing in parents' home for exactly the same reasons (i.e. to allow parents to release house equity without using a finance company) but backed-off when I understood the consequences for them and for me. The arrangement probably suited your situation at the time but no thought was given to the future, and that's where all the pitfalls lie in these arrangements.

I strongly recommend that you take advice from a solicitor qualified in inheritance/tax matters before taking any further action. A mortgage broker is paid to find you the best mortgage offer and is not motivated/qualified to advise on the wider issues of your situation. What you did is legal but has big downsides for all parties involved. The tax/benefits system is designed to discourage the actions you took because it is so often used as a loophole to avoid tax and/or claim erroneous benefits.

There is another possibility worth considering - mainstream equity release. I am not sure if your purchase of parents' home could be 'reversed' but worth researching.

Your parents were initially considering equity release and over the last decades these schemes have become mainstream and well-regulated. They are not dodgy and require advice from a specialist advisor to ensure people understand the benefits and risks. The interest rates are often fixed and are at an historic low. This would have been an option worth considering for mum now had you not made that decision back in 2008.

So, is there a way for you to return mum's home to her ownership in order to take advantage of ER? Is it possible for a solicitor to transfer the home back to mum and arrange the ER on the same day? This way the ER funds could be used to repay the mortgage. You would not qualify (you are too young) so the house would need to be in mum's name, but it would be a major benefit to you to remove the encumbrance of owning it. Equity release could allow you to do so without mum losing her home or increasing her housing costs. You could continue to help with costs of maintaining the home but would be free of the costs and consequences of servicing what is effectively her mortgage. 

The downside is that you may lose some/all of the capital gain in the property since 2008 despite having paid the mortgage and owned the property. ER financier may not be prepared to release more than the value of the current mortgage so you may not receive any capital sum. Having said that, presumably paying the mortgage was your contribution to your housing costs whilst living there, and would have been cheap compared to paying a commercial rent.

Mum would then have the benefit of all of the equity during her lifetime. Some would be required to repay the ER, plus rolled-up interest, when property is subsequently sold on her death/entry to care home. If she required residential care, the remaining equity could be entirely used-up in care home fees but putting mum at the mercy of the LA care system is not something I would wish to contemplate anyway. Note that this situation would have applied had you never purchased the property and had parents chosen mainstream ER from the get-go.

At the moment you have been gifted equity in mum's home but cannot benefit from that gift until the house is sold, and then you may face a hefty tax bill. In the meantime it is a poisoned chalice. You are the legal owner of the house and pay most of the costs but mum has 100% beneficial interest. The LA may exclude the property if mum needs care but I wouldn't bet on it as they are now actively investigating cases like this as they are very cash-strapped. 

If it's possible, the cleanest option IMO is for mum to downsize so you can pay off the mortgage and return ownership of the house to her. This puts both of you in the situation that would have arisen had you never taken this unfortunate action. You would be free of all the costs/constraints imposed on you by your well-intentioned actions and mum will be no worse off financially. Indeed, she may qualify for benefits which the current arrangement prevents (i.e. pension credit/council tax).

Without wishing to sound harsh, this was your parents' issue and it still is. You are paying the price of their lack of retirement cash and that is simply unfair. Mum can't afford to stay in the family home without ER and that would have been the case had you never intervened. Presumably, the cash released when you took-out the mortgage was used by your parents for their benefit?

I understand your need to help mum, and that you would never jeopardise her security, but she needs to be part of the solution to her problem. This was/is her problem, not your's, and you are paying a high price to enable her to maintain her status quo. There is no such thing as a free lunch.

A Declaration of Trust along with an airtight Will may also be a way of allowing you to move-on with your life but, as mentioned, there are disadvantages to this - not least the ongoing costs of subsidising mum's housing.

A solicitor's advice is required urgently so you are able to make an informed decision about how to best resolve the difficulty you now face.

I have bookmarked so please check back and let us know how you get-on. It's helpful for others who may have made the same mistake.

wallas74

Many thanks for your well informed reply again. My head hurts. 

I’ll seek advice and I’ll return with what I find out.