Helping sister buy house

Mack1979

I'm looking for some advice. Most of the information online is about parents gifting deposits to children to avoid IHT. My sister can afford a house up for £290, but as she lives alone, with her deposit of 50k will only give her a mortgage of ~4.5x salary which gets her to 220k. We're not in a position to gift her the 70k sadly, but we have significant equity and our mortgage deal is due up soon, so we could remortgage for the additional 70k. She's owned a house before (almost sold, moving areas) so she's not a first time buyer. 

 I've seen various notes about the pitfalls of this - additional stamp duty (3%?); having to be named on her mortgage; complications around legal agreements and wills; difficulties around exiting if we're not aligned on the timing. I'd appreciate any guidance of things to consider and ways to set up the agreements around rental agreements or repaying and any other costs or issues and how to avoid them. Apologies for the vague question, but struggling to figure out where to start. 

AdrianC

You have three basic options...

1. Gift her the £70k. She declares it to her lender as a gift, totally free of reservation etc. They are happy. But you can't afford that.

2. Loan her the £70k. She declares it to her lender as a loan. They are not happy, and won't lend.

3. You're a joint owner. You are also a borrower on the mortgage. +3% SDLT is payable.

There's subtle variations on those, including lying about 2 really being 1, but what happens if you fall out and she doesn't repay? With 3, what happens if one of you hits financial troubles?

With any of them, what happens if you need your money back sharpish?

badger09

Mack1979 said:

I'm looking for some advice. Most of the information online is about parents gifting deposits to children to avoid IHT. My sister can afford a house up for £290, but as she lives alone, with her deposit of 50k will only give her a mortgage of ~4.5x salary which gets her to 220k. We're not in a position to gift her the 70k sadly, but we have significant equity and our mortgage deal is due up soon, so we could remortgage for the additional 70k. She's owned a house before (almost sold, moving areas) so she's not a first time buyer. 

 I've seen various notes about the pitfalls of this - additional stamp duty (3%?); having to be named on her mortgage; complications around legal agreements and wills; difficulties around exiting if we're not aligned on the timing. I'd appreciate any guidance of things to consider and ways to set up the agreements around rental agreements or repaying and any other costs or issues and how to avoid them. Apologies for the vague question, but struggling to figure out where to start. 

I echo AdrianC's comments.

Sorry to be blunt, but your sister can't afford a house up for £290k. She can afford a house up to £220k.

I think you mean she can afford mortgage repayments on a house up to £290k, but mortgage lenders have to apply much stricter affordability these days. 

user1977

...or she just buys a property she can afford.

Brie

Or you remortgage at the higher amount you need to get the £70k based on the massive reno job you are planning but then that never happens so you give the spare £70k to sister.  

Legal?  Fraud??  Will her mortgage provider twig????  I think the answer to the last one is "yes" as they'll want to know where you got the ££.

MaryNB

Mack1979 said:

I'm looking for some advice. Most of the information online is about parents gifting deposits to children to avoid IHT. My sister can afford a house up for £290, but as she lives alone, with her deposit of 50k will only give her a mortgage of ~4.5x salary which gets her to 220k. We're not in a position to gift her the 70k sadly, but we have significant equity and our mortgage deal is due up soon, so we could remortgage for the additional 70k. She's owned a house before (almost sold, moving areas) so she's not a first time buyer. 

 I've seen various notes about the pitfalls of this - additional stamp duty (3%?); having to be named on her mortgage; complications around legal agreements and wills; difficulties around exiting if we're not aligned on the timing. I'd appreciate any guidance of things to consider and ways to set up the agreements around rental agreements or repaying and any other costs or issues and how to avoid them. Apologies for the vague question, but struggling to figure out where to start. 

Rent is payment for the use of something e.g. car or house, it doesn't apply in this scenario. The repayments will be loan repayments, and loans, as AdrianC has mentioned, won't be acceptable to the lender. Lenders expect any money from family to be in the form of a gifted deposit which must be given without any strings attached, and you have to sign a letter agreeing to that. The bank will need to know where all of her deposit is coming from. Even if there was some kind of work around (not that I'm aware of any), any repayments would be accounted for in her affordability checks. Repayments on £70k aren't going to be insignificant. It could reduce the amount she's able to borrow.

Mack1979

badger09 said:

Mack1979 said:

I'm looking for some advice. Most of the information online is about parents gifting deposits to children to avoid IHT. My sister can afford a house up for £290, but as she lives alone, with her deposit of 50k will only give her a mortgage of ~4.5x salary which gets her to 220k. We're not in a position to gift her the 70k sadly, but we have significant equity and our mortgage deal is due up soon, so we could remortgage for the additional 70k. She's owned a house before (almost sold, moving areas) so she's not a first time buyer. 

 I've seen various notes about the pitfalls of this - additional stamp duty (3%?); having to be named on her mortgage; complications around legal agreements and wills; difficulties around exiting if we're not aligned on the timing. I'd appreciate any guidance of things to consider and ways to set up the agreements around rental agreements or repaying and any other costs or issues and how to avoid them. Apologies for the vague question, but struggling to figure out where to start. 

I echo AdrianC's comments.

Sorry to be blunt, but your sister can't afford a house up for £290k. She can afford a house up to £220k.

I think you mean she can afford mortgage repayments on a house up to £290k, but mortgage lenders have to apply much stricter affordability these days. 

Correct, she can easily afford the repayments on a house up to 290k, but they will only offer 4.5x salary, which is hardly the "affordability" criteria. They're supposed to look at your outgoings post-2008, not just pick random multiples of salary. A mortgage advisor suggested this would be OK with lender but only if we were also on her mortgage, which obviously ties us to her financially and links our credit ratings (good for her, risky for us). 

AdrianC

Mack1979 said:

Correct, she can easily afford the repayments on a house up to 290k, but they will only offer 4.5x salary, which is hardly the "affordability" criteria.

Lender affordability tests include consideration of what happens when interest rates return towards historical norms from their current lows.

This is not the lenders being awkward. It's the industry as a body preventing people biting off more than they can chew because they've assumed the current situation is normal.

MaryNB

Mack1979 said:

badger09 said:

Mack1979 said:

I'm looking for some advice. Most of the information online is about parents gifting deposits to children to avoid IHT. My sister can afford a house up for £290, but as she lives alone, with her deposit of 50k will only give her a mortgage of ~4.5x salary which gets her to 220k. We're not in a position to gift her the 70k sadly, but we have significant equity and our mortgage deal is due up soon, so we could remortgage for the additional 70k. She's owned a house before (almost sold, moving areas) so she's not a first time buyer. 

 I've seen various notes about the pitfalls of this - additional stamp duty (3%?); having to be named on her mortgage; complications around legal agreements and wills; difficulties around exiting if we're not aligned on the timing. I'd appreciate any guidance of things to consider and ways to set up the agreements around rental agreements or repaying and any other costs or issues and how to avoid them. Apologies for the vague question, but struggling to figure out where to start. 

I echo AdrianC's comments.

Sorry to be blunt, but your sister can't afford a house up for £290k. She can afford a house up to £220k.

I think you mean she can afford mortgage repayments on a house up to £290k, but mortgage lenders have to apply much stricter affordability these days. 

Correct, she can easily afford the repayments on a house up to 290k, but they will only offer 4.5x salary, which is hardly the "affordability" criteria. They're supposed to look at your outgoings post-2008, not just pick random multiples of salary. A mortgage advisor suggested this would be OK with lender but only if we were also on her mortgage, which obviously ties us to her financially and links our credit ratings (good for her, risky for us). 

The 4.5x salary isn't a random number picked by the lender, it's set by the Financial Conduct Authority.It was part of an overhaul of mortgage lending rules in response to the 2008 crash.A small minority of customers may be granted loans above this LTI.  For example your sister may be able to get 4.75x with Halifax but doesn't meet the criteria for 5x. 

Plenty of us (myself included and I had a very similar income and deposit to you sister, I have very low outgoings and very good credit history) feel we could afford a bigger mortgage and it would help with our purchase but we're all tied to the same rules. 

It's not just her affordability on current rates, they also look at what she can afford if the rates increase significantly after her initial fixed interest term. My rate is 1.68% but my lender also looked at the cost of my repayments if it went up to something like 9% (the highest it's been for 20 years). The ending of a low intial rate was one of the reasons for the collapse of the subprime market in the US in 2008 and the housing market in general - people who were stretched on their mortgages  started defaulting because they couldn't pay the higher interest rates. 

Flugelhorn

Mack1979 said:

badger09 said:

Mack1979 said:

I'm looking for some advice. Most of the information online is about parents gifting deposits to children to avoid IHT. My sister can afford a house up for £290, but as she lives alone, with her deposit of 50k will only give her a mortgage of ~4.5x salary which gets her to 220k. We're not in a position to gift her the 70k sadly, but we have significant equity and our mortgage deal is due up soon, so we could remortgage for the additional 70k. She's owned a house before (almost sold, moving areas) so she's not a first time buyer. 

 I've seen various notes about the pitfalls of this - additional stamp duty (3%?); having to be named on her mortgage; complications around legal agreements and wills; difficulties around exiting if we're not aligned on the timing. I'd appreciate any guidance of things to consider and ways to set up the agreements around rental agreements or repaying and any other costs or issues and how to avoid them. Apologies for the vague question, but struggling to figure out where to start. 

I echo AdrianC's comments.

Sorry to be blunt, but your sister can't afford a house up for £290k. She can afford a house up to £220k.

I think you mean she can afford mortgage repayments on a house up to £290k, but mortgage lenders have to apply much stricter affordability these days. 

Correct, she can easily afford the repayments on a house up to 290k, but they will only offer 4.5x salary, which is hardly the "affordability" criteria. They're supposed to look at your outgoings post-2008, not just pick random multiples of salary. A mortgage advisor suggested this would be OK with lender but only if we were also on her mortgage, which obviously ties us to her financially and links our credit ratings (good for her, risky for us). 

4.5x was set for a reason - wouldn't take much of an interest rise for some people to be in serious difficulties. 

You have probably heard this all before but we were on a 12.5% mortgage and were thoroughly sick of hearing colleague gloat with a fixed 10% - have to say it was different matter when he had to remortgage and couldn't get any thing like as  low as that. 

Get the house she can afford and if If she has spare cash then better to just overpay mortgage / save for pension

csgohan4

OP have you heard of the self declaration mortgage and the sub prime crisis which caused in part the economy to crash in  2007-2008? 

There's a reason more stricter criteria are in place. .What you think you can afford is different in real world regulatory terms. They stress test your income at least +5% on top of the mortgage rate. 

Repossessions are very costly for the bank and the buyer. 

I could afford a mortgage higher than my 4.5x cap but rules are rules and don't forget that interest rates are the lowest it has been for decades. So do not get a sense of false security. 

Lending money to family is generally a bad idea and only do so if you do not expect it back

examples where it has gone wrong

https://forums.moneysavingexpert.com/discussion/6041966/how-to-safeguard-a-property/p1

https://forums.moneysavingexpert.com/discussion/6164489/joint-mortgage-sole-ownership-with-family#latest

Always good practice to buy a house you can afford. Otherwise you will get into a spiral of buying things you can ill afford.