Interest Free Loan to pay off Mortgage - Any Pitfalls?

FarmGirl78

I'm not sure if you understand what you're trying to do, or you're just having trouble explaining it to us.

So your relative is currently earning £200 a month interest on their investments/savings, and is thinking "I might as well lend this to Philipo, as long as they pay me the equivalent interest I'm earning then I won't be out of pocket"? Have I got that right?

And for the first couple of years relative is happy for you to not pay any of the"loan" back, but just to cover the interest at £200 a month? They'll still have their asset as the £160k is still invested in your house, and they've not lost out because you're paying them what they're not getting in interest having it in bonds/shares/savings?

So after the first 2 years you'll STILL owe them £160k. Initially its not "interest free" its the opposite.....its "interest only".

Is the relative saying they don't EVER want repayments of the lump sum and they'd be happy for you to in effect keep the £160k as one day you'll inherit it anyway?

Schwarzwald

philipo51617 said:

Sorry, £200 is min the relative wants back to start with as this is what they were getting each month in interest

I think you need to be really careful with this as you -no insult meant- really dont seem to understand what you are doing.

if you need to pay your relative at least £200 pcm that is a min interest rate of 1.5% so by no means it is interest-free as you write all over this thread.

if you are not even clear about this simple fact, i’d be afraid you are also missing a lot of other potential pitfalls in this set up

km1500

If they are going to encash the bonds to give you 160k, why instead don't the put it in a high  paying account eg a two to five year fixed rate bond paying double the 2% they are getting

They could then give you the extra 2% towards your mortgage

lookstraightahead

Is this relative your parent and do they have other assets if they need care? 

middleclassbutpoor

Sounds like you are trying to live beyond your means if you have other financial commitments on the horizon and this helps you manage this as it indicates you are thinking that these other commitments are going to stretch you. 

I once borrowed some money from a family member and the relationship changed in my head. I was indebted to someone and they were no longer just the relative I had always known. I felt like if I was spending money on a holiday for example - even though I was repaying them back as agreed - it would make me feel like I should be giving them this money or they would be thinking that I could afford more etc.  The mental impact wasn't anticipated at the outset. 

Therefore I would say never mix money and family in an arrangement like this. 

Whilst the first charge looks like the better option, you only have to read the number of threads on here where family relationships breakdown and the view you have now is tinted in a way that makes it look attractive.

Those tinted views can change over time though and usually they become less rosy than more. 

Have you considered things like the chance that your spending habits and approach to spending may mean that you are always finding other things that money could go towards rather than the debt?

Have you considered what happens if you become unable to pay the debt back and the family member isn't getting anything back? 

It's not risk free and there is an early sign now that you are looking for shortcuts to get what you want etc. My guidance would be to think very carefully and perhaps look at why you feel this needs to be considered in the first place. Shortcuts are often not what they seem when it comes to finances. 

propertyrental

I agree with others - pointless changing the property ownership. This is a simple loan agreement.

Relative lends you £160K, you do what you want with it (pay off mortgage, go on round the world cruise...) and in due course you repay the loan. It would be sensible to
1) draw up a loan agreement specifying when/how repayment will happen
2) place a charge on the property to protect the loan (just as a bank would do with a mortgage)

Is the £200 pm ongoing repayment of the original 160K loan ie each month the loaned amount reduces by £200?

Or is it compensation  for the relative not getting income from their bonds? And the loan amount remains at £160K? In which case it is interest and
a) relative would have to pay tax on the interest they earn from you and
b) how is that an 'interest free loan'?

Other complications might be if the relative needed care and applied for local authority funding - the LA would likely consider the £160 for means-testing purposes.

What if relative needed the money back for some reason....

tetrarch

Another consideration is the tax position.

At the moment, your relative is receiving interest from their bonds that is either taxed (dependent on their other income) or in a tax-free wrapper such as an ISA in which case they pay no tax on the income.

Loan interest is considered income under HMRC rules. 

From : https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim2010

"SAIM2010 - Interest: introduction

This section of the Savings and Investment Income Manual explains the taxation of interest received by individuals and trustees. It covers the legal definition of interest, inclusions and exemptions from the statutory charge, and explains who is chargeable. It also covers the sale of interest rights.

The charge to tax

There is no statutory definition of ‘interest’. In most cases, it is readily apparent that someone has received interest. The charge to income tax on interest is contained in Chapter 2 of Part 4 of ITTOIA05 at section 369, which includes the following.

• Interest from UK bank, building society and other savings accounts
• Interest on gilts, and on other securities issued by governments or companies
• Interest on loans made privately to individuals or companies
• Interest received on delayed payments or refunds
• Interest received by UK residents on bank accounts, securities or other investments situated abroad."

So it is interest income and (I think) therefore could be considered as part of the savings allowance, but this is not your problem but the donor's to consider.

Regards

Tet