Lending to children - what am I missing?

Early_Retire_Free

sidneyvic said:

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.

Well...that's an alternative point of view

As I mentioned above, they will get the money eventually anyway but at this stage £150k is a fairly sizeable dent in our retirement savings.

Under the current planned arrangement we would be giving them £4,500 per annum.  Doesn't seem particularly tight to me but your financial circumstances might be different.

[Deleted User]

Early_Retire_Free said:

sidneyvic said:

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.

Well...that's an alternative point of view

As I mentioned above, they will get the money eventually anyway but at this stage £150k is a fairly sizeable dent in our retirement savings.

Under the current planned arrangement we would be giving them £4,500 per annum.  Doesn't seem particularly tight to me but your financial circumstances might be different.

Please don't listen to this. There is also the fact that most children would want to stand on their own feet and this is a win win situation for everyone and incredibly generous and gives your children a sense of security I think of knowing their long term financial outlook. This is something that makes sense to all involved.

simon_or

Personally what I would do is ask them to get the discount or fixed mortgage they prefer for the length of fix they want and then gift them the difference in monthly payment between their current mortgage and the new mortgage.

So if they take out a 5 year 5% fix which has a £300/month higher monthly payment than the current 2% mortgage, either gift them 18k (300 x 60 months) or set up a monthly standing order for £300. No interest kerfuffle, no tax implications, in fact the gifting during your lifetime will reduce your estate for IHT (if any).

I think that's a good balance of helping them while letting them take ownership of the kind of mortgage, length of fix etc that they want and budgeting for the monthly payments accordingly.

Early_Retire_Free

simon_or said:

Personally what I would do is ask them to get the discount or fixed mortgage they prefer for the length of fix they want and then gift them the difference in monthly payment between their current mortgage and the new mortgage.

So if they take out a 5 year 5% fix which has a £300/month higher monthly payment than the current 2% mortgage, either gift them 18k (300 x 60 months) or set up a monthly standing order for £300. No interest kerfuffle, no tax implications, in fact the gifting during your lifetime will reduce your estate for IHT (if any).

I think that's a good balance of helping them while letting them take ownership of the kind of mortgage, length of fix etc that they want and budgeting for the monthly payments accordingly.

That also an option.

The only issue here is the arrangement fees and potentially the reduced flexibility.

Annisele

Early_Retire_Free said:

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

If you actually lend your children the money, one potential risk is that you find you actually can't change again in two years.

Maybe your children lose their jobs / the value of their property plummets (it'd have to really plummet given the LTV you're talking about) / something else happens happens so that it's completely impossible for your children to get a mortgage from a traditional lender. Then you're stuck either lending them the money forever, or taking possession action. That might be OK if you could afford to just write the money off, but it sounds like you can't.

If you just make a monthly gift of all/part of the returns you make on your savings (what simon_or said) , then in my view you're opening yourself to much less risk.

silvercar

Early_Retire_Free said:

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?

option 2, you invest @5% and pay 20% tax on 6.5k, so the 7.5k reduces to 6.2k. net benefit is 1.7k.

(Option 1, I'm assuming they pay for a nice holiday or whatever as a thank you, so you aren't paying tax on your kids giving you 3k.)

So we have helped one of our kids (will do similar for the other when the time is right) with a deposit. But this was structured as a gift, not an interest paying loan. On the basis that it is good inheritance tax planning! Young enough (late 50s) that we are still working so can replenish the savings. Personally, I think what you are doing is very generous, but I wouldn't be comfortable asking them for the £3k per year. If I was lending them 150k, I wouldn't be charging interest, but that is me.

dimbo61

Check out the offset mortgage deals with ybs
You open an Offset account with your savings and they save paying interest on £150,000
If you need money to pay for a new car or holidays you can withdraw your money.
You talk about gifting £4,500 each year into a LISA ( stocks and shares !)

sevenhills

sidneyvic said:

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.

It's not always wise to lend money to family. If the OP has £150,000 to loan, it would be better to give them £50,000
What if they divorced or serious illness/injury?

dimbo61

You talk about the children ( adults ) 
They already have a mortgage so hopefully have built up equity in the property.
Now you may need to help a little with some cash to get the right LTV for an Offset mortgage with YBS.
You and you other half open an Offset account and put your savings into this account.
Your children can also open offset accounts to reduce the amount of Interest they pay each month and the bigger the repayment they make each month.
Only you and OH can touch your savings !
If relationships break down No one can touch your money.
You can help the children each year by giving a regular payment say £4000 each to save into a Stocks and shares LISA so they get the £1,000 bonus towards there retirement ( can be taken at 60)