Interest Free Loan to pay off Mortgage - Any Pitfalls?

philipo51617

We have an option to get an interest free loan to pay off our mortgage and wondered if there are any pitfalls that i'm not thinking of...i.e. it sounds to good to be true.

We have £160k left on mortgage that would be paid by a relative, and they would be added to mortgage as a tenant in common who just wants £160k back.
Therefore there would be 3 of us on the Deeds/ Title.  The relative doesn't want a share of equity etc and the deed of trust would be worded to say they get £160k back if we sold etc.

Initially the money would free up cash for us to finish home improvements and pay for a wedding, then after a couple of years we would begin to pay the loan back.

As we pay loan back, we would buy back the equity/loan...i.e. alter the tenants in common trust agreement so the share would be reduced to £140k for example. 

If circumstances changed we would be able to get an unencumbered mortgage as have equity in the house.

The money the relative would be earning in interest via bonds, we would pay each month to them as compensation.

Any issues i'm not thinking of would be great. 

user1977

Why would they be "added to the mortgage" if you've just paid the mortgage off? Do you mean added to the title? Why not just grant them a charge to secure their loan, rather than making them a joint owner?

housebuyer143

I Second the first charge on the property to secure their monies, that way you don't have to change the declaration of trust everytime you pay them something and they have no legal ownership of your property.

If they are on the title deeds and get into financial trouble, nothing stops restrictions being added to your title from creditors which would hinder you selling, ,Maybe you fall out and they decide they don't want you to sell, as legal owners they can make this impossible. Best to keep third parties from being named owners. Adding them might also lump them with stamp duty to pay and make them ineligible from benefits in the future as it's a second property, assuming they own their own home.

Isn't the interest from bonds at least 3% right now? What if it goes up again, would a mortgage suddenly work out cheaper?

Zerforax

The biggest pitfall is what happens if your relationship with the relative sours? Mixing money and relationships always complicates everything. It's a very large sum of money too.

What is the benefit for the relative that is helping you? They could be investing or earning interest on the 160k themselves.

Jonboy_1984

Depending on the relatives age it would be worth looking at what would happen if they needed to go into self-funded care in this situation.

If they are on the deeds and the council spot an "asset" it could get interesting.

philipo51617

Thanks @user1977 and @housebuyer143, will look into the first charge properly as seems it could be wise to keep separate, especially as @Jonboy_1984 points out about asset ownership and care (though hopefully this isn't required, but you never know).

@Zerforax there is no real financial benefit to the relative, the benefit is seeing us utilise the money and be in a better financial position ourselves.

@housebuyer143 they get about £200 interest from bonds at the mo and are happy for us to keep paying them that.  If rates went up, they are saying they wouldn't ask for more.

grumiofoundation

If you are paying your relative interest it isn’t an interest free loan as your thread title suggested? 

As you will be paying interest what is the advantage of this over a mortgage (a mortgage can can never be ‘called in’ early) ? 

Edit: to reply to your comment above -
 does this really put you in a much better financial position? 

steampowered

The relative should not be a "tenant in common". That would mean they own a share of the property that would change as the value of the property changes.

The more normal way of doing this would be for the relative to make a loan, and the loan is secured with a mortgage - i.e. a private mortgage. 

Even that has complications. The relative will need to pay income tax on the interest they receive. This arrangement is not "interest free" - the "compensation" you are paying the relative is interest and they will be taxed on it accordingly.

And also where does the additional money come from. If the relative's £160k just pays off your mortgage where does the additional cash for the wedding / improvements come from? It sounds like it could take decades for you to pay back the relative in full.

Personally I'd much rather just keep a normal bank mortgage. If you need more cash now you would look at remortgaging to borrow more. The relative should educate themselves on how to invest a large sum of money - e.g. stocks & shares ISAs.

philipo51617

The money will likely be inherited in the long term, but the relative has no intention of investing in stocks and shares etc.  It's sat in bonds for a number of years earning little and they have been very content with their retrurn.  This is very much a good will gesture as our mortgage has gone up £300 and we have other potential financial commitments @steampowered

In terms of our financial position it would improve greatly @grumiofoundation .  £160k mortgage on 3 year fixed @4.12  (£850 month) we would have £149k remaining after 3 years.

If mortgage was paid off:
£200 to relative each month and £650 additional funds towards home improvements etc for 18 months (for example).  Therefore pay relative back for next 18months, we would have paid £11,700 off the loan (£650*18), we would have £148k debt remaining.....but would have also funded the home improvements.   

Singlemummy_2

philipo51617 said:

The money will likely be inherited in the long term, but the relative has no intention of investing in stocks and shares etc.  It's sat in bonds for a number of years earning little and they have been very content with their retrurn.  This is very much a good will gesture as our mortgage has gone up £300 and we have other potential financial commitments @steampowered

In terms of our financial position it would improve greatly @grumiofoundation .  £160k mortgage on 3 year fixed @4.12  (£850 month) we would have £149k remaining after 3 years.

If mortgage was paid off:
£200 to relative each month and £650 additional funds towards home improvements etc for 18 months (for example).  Therefore pay relative back for next 18months, we would have paid £11,700 off the loan (£650*18), we would have £148k debt remaining.....but would have also funded the home improvements.   

£200 back to the relative and £650 to home improvements? 

That’s not repaying £11,800 over 18 months - £200 loan repayment x 18 months is only £3600

 

philipo51617

Sorry, £200 is min the relative wants back to start with as this is what they were getting each month in interest and using it to top up pension i think...i.e. extra pocket money they live on. 

When we have done the home improvements etc (after 18 months), is when we would really start paying off the loan and why i used example of £650 *18.