Helping adult child buy first home

lookstraightahead

I'm sorry to go off at a tangent here. It sounds to me as though you have a lot of equity but you're not 'cash rich' as such. Two things spring to mind:

Why does your son need to buy now, can't he rent? How old is he?

Also, maybe you could sell your house to release the equity, and downsize now? That way you have the cash to hand to gift / lend.

I am a parent myself of children in their twenties and I love them too, but I wouldn't be jeopardising my own security.

Ramouth

I don’t have any useful advice but just wanted to say what a lovely thing you are doing to help your son and I really hope it works out for you.

Bluebell1000

I have a little experience with this as my Dad very kindly provided a loan to help us with our house buying, and I did some research at the time. As I understand it, if you lend him e.g. £50,000 and your son repays exactly £50,000 then there is no interest and no taxable income for you. If your son is paying you £50,000 plus the 1.4% interest that you are paying on the mortgage, the amount that he pays you over and above the original loan amount will count as your taxable income. BUT (this is where I am less sure) I think you can have £1000 additional income without HMRC taxing it, so unless the loan is a very high amount then perhaps you would fall under the allowable bracket? 

Tokmon

Kismet_Hardy said:

Indigo_and_violet - We shall fund the entire purchase. Most of it will be from the borrowing against our home - something up to £250k. A very small amount, perhaps 10K, will be a gift. We aren't intending to make any profit whatsoever from the deal. The whole point is to get him on the housing ladder and we can't see any other way to do this as we can't gift him any more (we have other kids at Uni) and lenders won't give him a mortgage if we loan part of the amount needed. The mortgage we are taking out is going to be part interest only and part repayment. If, at the end of 5 years, he has managed to pay £40k off the mortgage, which he might be able to do with a lodger and the low interest rate, he will need a smaller mortgage to pay the outstanding amount of our mortgage off.  
Saajan_12 - Yes, it is a private mortgage but we don't intend to charge any interest. We just want him to cover the mortgage repayments. I'm a little confused about what you say about the 1.4% being liable to income tax, but I'll give it more thought when I have the opportunity. 

If he earns enough now to get a mortgage with effectively a £40k deposit then why don't you instead let him have just the £40k for the deposit and then get him own mortgage now because that would be far less financially risky for you. If he doesn't earn enough now to get a mortgage then what makes you think he will in 5 years time?

Kismet_Hardy

Just to pick up on a few points. We aren't in the mega rich bracket, but we aren't cash poor either (although we couldn't lay our hands on a spare £250k!). Our cash is working for our retirement at the moment and we think that borrowing at this low interest rate is a better way of helping him without putting ourselves at risk.
He is in his mid 20s and he and a couple of his friends have been trying to find somewhere to rent for a while. On each occasion, they have been outbid or the landlords have chosen a family as tenants. It is pretty depressing for the youngsters at the moment. In any event, he would be paying just as much in rent as he would paying the mortgage (due to having a lodger).
No way are we downsizing at this stage. We love where we live and have other kids who will probably need to live here upon graduation. 
Thank you Bluebell, that's what another poster said. I'll look into that a little deeper.       

Annisele

If you're intending this to be cash neutral for you (i.e. son's payments to you match your interest payments to your lender) AND you don't want to charge your son interest, then his debt to you is going to reduce faster than your debt to your lender.

I find it easier to talk about this sort of thing with figures, so I'm going to make some up. I've tried to keep them vaguely realistic, but please bear in mind they are made up, and I make no claims for my arithmetic!

I think that your plan means:

• You will borrow ~£250k secured on your own house, over an 8 year term, fixed for 5 years. I'm going to pretend you'll be borrowing about £66k on a repayment basis and the rest interest only, and that your mortgage will cost you about £940 a month. I'm also going to pretend that after 5 years, your mortgage debt will have reduced by about £40k.
  
• You will then give your son £20k or so for him to spend on a house.
  
• You will also lend your son £250k on an interest free basis, secured on his new house. You are going to ask him to repay about £940 a month to you.
• Given that you aren't charging your son interest, the whole of the money he pays you will go to reducing the capital. So, after five years (assuming everything goes well) he'll have paid you about £56,400. That means his debt to you will be about £193,600. Your debt to your lender will be nearer £210,000. (Neither of those figures are correct, but the principle holds - you are paying interest, so you'll see your debt reduce more slowly than your son will.)

If you're happy with that, all well. But I mention it just in case your plan means you're giving your son more money than you intend - if you keep his debt interest free, then in effect you're giving him a bit more money every month.

I also think it's worth everybody involved thinking about what would happen in the event of any of the "4 Ds" happening to any of the parties- death, divorce, debt (bankruptcy), or disease (/inability to work). For example, if you have an entirely open ended, interest free loan to your son, then he dies leaving his entire estate to the local cats home - you might wish you'd structured things so that the loan was repayable on his death. Or if he marries and then divorces, you might be rather less keen on an arrangement that ends up enriching your son's ex on a monthly basis.

saajan_12

Kismet_Hardy said:

Saajan_12 - Yes, it is a private mortgage but we don't intend to charge any interest. We just want him to cover the mortgage repayments. I'm a little confused about what you say about the 1.4% being liable to income tax, but I'll give it more thought when I have the opportunity. 

Well you're paying 1.4% interest to the bank within your monthly payments. If son is covering the same monthly payment, then  he's paying you the same % interest as you're paying the bank. At any point, the balance of his loan from you is the same as the balance of your mortgage, so when he's able to get his own mortgage, all that money goes to pay you off, which you use to pay off your mortgage. 

If you didn't want to charge interest, then either he'd pay a lower monthly payment and you pay the interest portion to the bank yourself, or the he pays the full payment but all his money goes to capital not interest, so the balance of his loan reduces faster than the balance of your mortgage. 

jennifernil

Kismet_Hardy said:

Indigo_and_violet - We shall fund the entire purchase. Most of it will be from the borrowing against our home - something up to £250k. A very small amount, perhaps 10K, will be a gift. We aren't intending to make any profit whatsoever from the deal. The whole point is to get him on the housing ladder and we can't see any other way to do this as we can't gift him any more (we have other kids at Uni) and lenders won't give him a mortgage if we loan part of the amount needed. The mortgage we are taking out is going to be part interest only and part repayment. If, at the end of 5 years, he has managed to pay £40k off the mortgage, which he might be able to do with a lodger and the low interest rate, he will need a smaller mortgage to pay the outstanding amount of our mortgage off.  
Saajan_12 - Yes, it is a private mortgage but we don't intend to charge any interest. We just want him to cover the mortgage repayments. I'm a little confused about what you say about the 1.4% being liable to income tax, but I'll give it more thought when I have the opportunity. 

You  may not think you are charging him any  interest, but HMRC will not see it that way!
I have set up a private mortgage arrangement with our daughter, not nearly as much as £250k, properly recorded with a charge on the property, I have to tell HMRC the amount of interest she pays me, and would be taxed on it if it took my income above my personal allowance.  

As a pensioner with only a small pension, my pension plus the interest she pays is still below my allowance, so no tax for me to pay,  but it sounds like that would not be the case for you if you are both working.

getmore4less

user1977 said:

Indigo_and_Violet said:

Kismet_Hardy said:

• We don't want  the mortgage payments made by the son and his lodger to be seen as our income, as it simply will not be our income. 

I'm wondering how you've come to this conclusion? They are payments from someone else that are being used to pay off a mortgage in your name. 

But it isn't "income" which is relevant for Income Tax purposes.

if those payment include any interest that that is taxable income.

eg. loan the son £60k of over 5 years(60months) paid back interest free is £1000pm  if they pay back any more that is taxable.

It could be structured that a  gift element is a loan and also paid back.

if we look at the £250k at 1.4% interest only  over 5 years

amount	rate	payment	owing	interest
£250,000.00	1.40%	£291.67	£250,000.00	£17,500.00

A £10k gift won't touch the interest due

if the target is to have paid off £40k in 5 years down to £210k

amount	rate	payment	owing	interest
£250,000.00	1.40%	£935.66	£210,000.05	£16,139.65

still too much interest to cover the £10k gift element

Kismet_Hardy

Thank you everyone. I now understand the interest issue. Some of you have been very kind in providing lots of detail and calculations, or personal experiences, so it is all very clear to me now.
What we could do is the following. Instead of giving him a cash gift to add to the mortgage loan, we could pay the interest element every month as a gift. I think that might work without offending any tax rules!
Just to answer a poster above who was asking why we think he would be able to sort out his own mortgage in 5 years - his salary is likely to increase. In any event, according to our mortgage broker, the income from the lodger is likely to be taken into account after her has had a lodger for a while, whereas it isn't taken in advance at this stage. Of course, he may be in a settled relationship then too. 
We shall tie up things legally, to protect the interests of ourselves and the other children.  Thank you all again.