Family loan for offset mortgage?

phinda

Morning All, looking for some impartial views.

I have an offset mortgage. It is a fee-free mortgage... so the minimal amount I require to make it the cheapest offer is y amount. I have this amount as a "security" blanket in case of redundancy sitting in the offset account. The interest on the mortgage/offset is ~2%.

My mum (retired widow) has savings investments twice my offset savings (2y) currently sitting in NSANDI or major banks earning pretty poor interest rates. She has also got a state pension and a pension from my dad. We are considering putting half her savings (y) in my offset in the form of a loan (with loan agreement). In return, I will pay her 1% interest (which I believe is much better than most banks). The loan is flexible in that she can recall any of it at any time. I think I would need to declare the interest income in her annual tax returns.

In return, I get to use the remaining 1% of interest earned in the offset to reduce my mortgage.

Other than investing her money in the longer term stocks and shares (which i think is too risky). I cannot see any other savings routes which will provide the same flexibility and return... and I think/hope is also a secure investment (as in I'm honest (if I can say so myself!) and not going to spend her money on anything else, also written into loan agreement).

What are your views on the risks and any other implications? Is this a good idea? TIA

K_S

@phinda One risk I can think of (to your mum) is what happens if you pass away with half her lifetime savings sitting in your mortgage. Will the loan agreement stand up to scrutiny if there is a dispute?

Depending on how much access she needs to these funds, she can currently get 0.5-0.8% with the protection of a government backstop with regulated banks. Granted she will get a little bit of extra interest, but whether that will compensate on it's own for the loss of protection only she can assess.

Of course, this is a transaction between a mum and her child so there are other aspects to keep in mind besides the cold hard numbers.

getmore4less

What's your LTV? (with and without your offset pot) 
Which lender?
Is that ~2% a tracker or fix and what term and planned full term. 

What interest rate did you use for saving to work out the breakeven a regular mortgage. 

There are offset options that protect the relatives money.

Death is not the only risk to that money if actually transferred to you.

clueless_but_curious

You haven't stated whether you are entering in to a contract.  The income tax and inheretence tax consequences cannot be determined without a contract.  If the 1% is deposited in to any of your mother's bank accounts, a tax inspector would be expecting income to be declared.
There are lots of 'what ifs' to consider but these should be insurable 

phinda

@getmore4less
Thank you for responding ....LTV is approx 60%. Fixed for 5 years from this Jan. About 20 year remaining.
Not sure I understand what you mean by the interest breakeven... 
It wasn't the plan to use my mums savings in my offset... it just looks like a better option as my mum gets a better interest rate 1% than banks offering and I pay my mum interest rather than paying the bank. I also get to benefit from the 1% remaining that isn't paid in interested on my mortgage. 

An advisor when taking out the mortgage calculated that so long as I have more than x in my offset account it would be the better option vs the other offset with ~£1000 fee (but lower interest). I have about 1.5x (=y) in the offset of my own money. Dont know details... but it was an advisor.

I was hoping to understand those risks you mention (other) than death?

dimbo61

Not sure which lender your with for the Offset mortgage but it's not Yorkshire building society is it ?
They offer friends and family Offset mortgages where Mum, Dad and Uncle Fred can open an Offset account in their name to save you interest on your offset mortgage. 
Brilliant really 

getmore4less

You need to compare against a non offset not just a fee based offset from same lender. 

If you don't use the relatives money as part of the offset how do you save interest. 

More details needed
Lender, rates, amounts would also be useful to decide if fee based might be better, often are over 5 years for relatively small mortgage

LTV around 60% is it more or less before offset money, with offset money.
60% is a common break point on rates. 

How much of the offset money do you need/want to keep available. 

phinda

getmore4less said:

You need to compare against a non offset not just a fee based offset from same lender. 

If you don't use the relatives money as part of the offset how do you save interest. 

More details needed
Lender, rates, amounts would also be useful to decide if fee based might be better, often are over 5 years for relatively small mortgage

LTV around 60% is it more or less before offset money, with offset money.
60% is a common break point on rates. 

How much of the offset money do you need/want to keep available. 

@getmore4less ...
Thank you again for your views. This isn't a new deal that I am looking to take out. It is an existing deal I entered into in Nov last year. This was the best option at the time based on my own money (savings) that was set aside as an emergency fund. Obviously, if I need to dip into the emergency fund... then it isn't the best deal.... but that is the risk I'm taking. 

Having my mum's money invested in the offset account is a bonus for me on top of the original mortgage deal. I get to save 1% in interest I would have paid, and I pay the other 1% to my rather than the bank. My mum benefits as she will get a flexible account (i.e can withdraw anytime) and a 1% savings rate (beating most banks).

Risks/complication:
Need to put in place a robust loan agreement/contract (legally binding, include pos eventualities such as death or divorce)
My mum needs to declare and potentially pay tax on the interest she earns from this, and include in the annual declaration.
My mum is putting a lot of trust in me (and with life savings for an older person this is a significant risk).

If my mum dies, money is returned to her estate as per the loan agreement.

I guess the only question that I can think of is ... What are the tax implications on me? (nothing?)

phinda

dimbo61 said:

Not sure which lender your with for the Offset mortgage but it's not Yorkshire building society is it ?
They offer friends and family Offset mortgages where Mum, Dad and Uncle Fred can open an Offset account in their name to save you interest on your offset mortgage. 
Brilliant really 

@dimbo61... thank you. Unfortunately, this is an existing deal that isn't with Yorkshire but another building society. When I entered into the contract I didn't envisage/or need my mum's money ... so wasn't thinking I needed the family option at the time. 

vacheron

I have some of my parents money in my offset account due to the awful interest they were earning, but they are retired so don't want to risk having to invest long term if the markets take a turn.
 
I was happy to give her 100% of the savings, but she insisted we split it 50/50. It is still making her significantly more than she could easily obtain elsewhere. 

We didn't arrange it as a loan or anything for us. She just sent the money over in a bank transfer. If anything happens to me it is documented in my files and my wife will see that it is returned to them. 

Mortgage is now fully offset, and I prefer to invest any surplus, so it is an easy way of me taking on the long term risk while she keeps access to highly liquid cash at a market leading rate.

getmore4less

If you already have the mortgage then you are just borrowing X off your mum to offset

If you want to simplify the situation you could borrow on an interest free basis and be creative.

Should be no tax issues for you biggest risk is mum needs the money and it has gone.

Some(said publicly on here) even set these up similar as  gift/loan and will pull out the relevant paper work when needed.