Lending to children - what am I missing?

Early_Retire_Free

We are wanting to help the children with a loan as their current 2 year (2.0%) fixed deal ends in December.

The initial plan was to led them the full amount (c£150,000 which is 55% LTV) and charge them the same interest rate.

At the moment I see that there are 2-3 year discounted variable rate deals of 3.0% available at those LTV's i.e. 1% above what they are currently paying.

I could deposit the £150,000 for two years at 5% and susidise their rate down to what they were paying previously i.e. 1% and I would still be earning 4% rather than the 2% under a pure loan.

Clearly the risk is that if the base rate does up we could lose out (but after two years we could change again). 

Am I missing anything (including other options)?

silvercar

Depending on your personal tax situation, you only have tax free interest up to £1000 (if you have used your personal allowance on income), so you would be paying tax at your marginal rate on anything over that. 5% on £150k = £7,500 less £1k personal allowance leaves 6.5k taxed at your marginal rate. Assume 20% leaves you with the 1k+5.2k=6.2k, effective rate of 4.13%. If you are paying tax at 40% your effective rate is 3.27%, at 45% your effective rate is 3.05%.

Edi81

What if the children don’t pay…are you going to repossess their property?

Early_Retire_Free

Edi81 said:

What if the children don’t pay…are you going to repossess their property?

Honestly, I prefer knee-capping 

JMA74

Have you considered putting your money into an account that is linked to their mortgage?  An offset mortgage would mean they dont pay interest, you keep ownership of your money, and you dont have to get mixed up in any legal agreements around repossessing their property in event of non payment. 

They could pay you your lost interest as a facility fee each year. 

Early_Retire_Free

silvercar said:

Depending on your personal tax situation, you only have tax free interest up to £1000 (if you have used your personal allowance on income), so you would be paying tax at your marginal rate on anything over that. 5% on £150k = £7,500 less £1k personal allowance leaves 6.5k taxed at your marginal rate. Assume 20% leaves you with the 1k+5.2k=6.2k, effective rate of 4.13%. If you are paying tax at 40% your effective rate is 3.27%, at 45% your effective rate is 3.05%.

Thanks

We already have in excess of £1,000 in interest.

Everything will be in my wifes name who is a BR taxpayer.

My simple maths were:

Option 1. We lend them £150k @ 2%, they pay / we get £3,000 pa.
Option 2. They borrow @ 3.0 % (from a bank), they pay £4,500, we invest @ 5% and get £7,500

Option 2. results in a net benefit to the family of £3k per annum

That benefit reduces if the rate goes up.

Is it as simple as that?

housebuyer143

Second the offset mortgage.I believe Yorkshire building society allow family accounts to be linked. It will never be their money, the mortgage company won't make you declare it as a gift and you can take it back at any time should you need it. 

Early_Retire_Free

housebuyer143 said:

Second the offset mortgage.I believe Yorkshire building society allow family accounts to be linked. It will never be their money, the mortgage company won't make you declare it as a gift and you can take it back at any time should you need it. 

We're not concerned about them not paying the money back (even if it were a risk, they will get the money anyway someday )

My concern with offset mortgages is that there is no gain i.e. you're effectively lending at the savings rate.  Or have I not understood?

[Deleted User]

Early_Retire_Free said:

We are wanting to help the children with a loan as their current 2 year (2.0%) fixed deal ends in December.

The initial plan was to led them the full amount (c£150,000 which is 55% LTV) and charge them the same interest rate.

At the moment I see that there are 2-3 year discounted variable rate deals of 3.0% available at those LTV's i.e. 1% above what they are currently paying.

I could deposit the £150,000 for two years at 5% and susidise their rate down to what they were paying previously i.e. 1% and I would still be earning 4% rather than the 2% under a pure loan.

Clearly the risk is that if the base rate does up we could lose out (but after two years we could change again). 

Am I missing anything (including other options)?

We did similar to this with my parents in 2020 because it was complicated getting a mortgage as my husband was very recently s/employed so our options were very limited. We worked this with my parents for a short term basis so we chose to work it so that it was on an interest only basis and we paid my parents an interest rate that worked to be slightly more than they could get in a savings account at the time and less that we would pay on a mortgage rate at the time so it was win win. By doing it interest only it felt clear and we would just repay the entire initial sum upon remortgage. It worked brilliantly.

We had a contract between us on my instistence (just one found and paid for online that did they job) but both our solicitors looked it over on purchase and were happy with it. If we had taken this on over a longer term, I suppose the capital part of the loan would have eventually become part of my parents estate. We kept it on for just over a year due to our circumstances but in reality all parties would have been happy to carry on.

Brie

My vote would be for a linked account or your option 2.  Either way you keep your own money. 

That's important in case the kids split, sell the house and splurge the proceeds, forget to insure it and it burns down, whatever extreme outcome you can imagine.  Also if you or your OH suddenly find yourself in need of local authority funded care you still have the $£$£$ to make your own decisions.   Hopefully none of these things will happen but it's best to plan for a certain amount of disaster in one's life.

sidneyvic

Personally if I had the money to "lend" my kids I would feel a bit tight not just giving it to them let alone charging them interest..... Not sure what the world is coming to when you need to post here asking strangers how much to charge your own kids.