Providing a Private Mortgage to our son to buy a property

GazaEDI

Our son will be going to Uni in just over a year. We had considered buying a property for him to live in but the Land & Building Tax in Scotland on second homes makes that very expensive. A £300K property would cost us £22,600 in LBT, whereas if our so bought it, it would be £4,000. To get around this, we are considering providing him with a private mortgage to buy a home in his own name. He has around £40k in savings in a Junior ISA and we are suggesting that he uses £20k of that as a 'deposit' and to pay the LBT. We'd then lend him the rest on an interest only basis. Our view is the mortgage would run for a maximum of 7 years as this would give him time to finish his studies and get a job where he should be in a position to qualify for a mortgage from a bank/building society.

He has a part time job earning £800 per month (this can vary as he can increase hours during holidays) and in order for him to cover the interest payments, we are suggesting he gets a flatmate and the rent from this would cover his interest.

One other thought we had was not to charge interest but agree a 'shared appreciation' deal. We'd provide a 100% mortgage for a similar period but at the end of the period, or before if he applied for a residential mortgage, any appreciation in the value of the property would be shared e.g. Purchase Price = £300k. Valuation at remortgage or sale price = £350k. We'd share the £50k appreciation and split this 75/25 (in our favour). He'd keep the income from renting the room.

Any pitfalls in this approach? 

DullGreyGuy

GazaEDI said:

Our son will be going to Uni in just over a year. We had considered buying a property for him to live in but the Land & Building Tax in Scotland on second homes makes that very expensive. A £300K property would cost us £22,600 in LBT, whereas if our so bought it, it would be £4,000. To get around this, we are considering providing him with a private mortgage to buy a home in his own name. He has around £40k in savings in a Junior ISA and we are suggesting that he uses £20k of that as a 'deposit' and to pay the LBT. We'd then lend him the rest on an interest only basis. Our view is the mortgage would run for a maximum of 7 years as this would give him time to finish his studies and get a job where he should be in a position to qualify for a mortgage from a bank/building society.

He has a part time job earning £800 per month (this can vary as he can increase hours during holidays) and in order for him to cover the interest payments, we are suggesting he gets a flatmate and the rent from this would cover his interest.

One other thought we had was not to charge interest but agree a 'shared appreciation' deal. We'd provide a 100% mortgage for a similar period but at the end of the period, or before if he applied for a residential mortgage, any appreciation in the value of the property would be shared e.g. Purchase Price = £300k. Valuation at remortgage or sale price = £350k. We'd share the £50k appreciation and split this 75/25 (in our favour). He'd keep the income from renting the room.

Any pitfalls in this approach? 

How formal are you intending to do it? Pay for a solicitor to draw up the loan agreement, put a charge on the property etc or do a more informal agreement?

The main pitfall is what happens if you fall out with your son, would you issue court proceedings against him to repossess his home? Obv if you've done the informal route enforcing the debt would be difficult. What would you do if his plans dont come to being and he ends up on NMW with no hope of a £285,000 mortgage in 7 years time?


Personally, lending between friends and family should always only be done to the amount you'd be happy to write off. Whilst many think their bonds are unbreakable and "it would never happen" there are many parent/child relationships I've seen broken because of life choices or choice of partner(s) etc etc 

silvercar

Firstly, lending to family can be risky if things don’t go to plan. Can you afford to consider this money a gift? If not, I would steer well clear. Otherwise you have no back up plan if he isn’t in a position to repay you as planned. Hat happens if he wants to go travelling or further studies? What happens if his future work takes him to a different area? Would you act as landlords?

Secondly, he loses first time buyer status on this property, he may regret that in the future.

Thirdly, in my opinion, students don’t make good landlords, I’m not even sure they are responsible enough to manage a home at that age!

Financially, if you charge him interest you have to pay tax on it. If you have a ‘shared appreciation’ I’m not sure if it would be income tax or capital gains, but it would be taxed in some way.

What happens if you need the money and he can’t get a regular mortgage?

GazaEDI

DullGreyGuy said:

GazaEDI said:

Our son will be going to Uni in just over a year. We had considered buying a property for him to live in but the Land & Building Tax in Scotland on second homes makes that very expensive. A £300K property would cost us £22,600 in LBT, whereas if our so bought it, it would be £4,000. To get around this, we are considering providing him with a private mortgage to buy a home in his own name. He has around £40k in savings in a Junior ISA and we are suggesting that he uses £20k of that as a 'deposit' and to pay the LBT. We'd then lend him the rest on an interest only basis. Our view is the mortgage would run for a maximum of 7 years as this would give him time to finish his studies and get a job where he should be in a position to qualify for a mortgage from a bank/building society.

He has a part time job earning £800 per month (this can vary as he can increase hours during holidays) and in order for him to cover the interest payments, we are suggesting he gets a flatmate and the rent from this would cover his interest.

One other thought we had was not to charge interest but agree a 'shared appreciation' deal. We'd provide a 100% mortgage for a similar period but at the end of the period, or before if he applied for a residential mortgage, any appreciation in the value of the property would be shared e.g. Purchase Price = £300k. Valuation at remortgage or sale price = £350k. We'd share the £50k appreciation and split this 75/25 (in our favour). He'd keep the income from renting the room.

Any pitfalls in this approach? 

How formal are you intending to do it? Pay for a solicitor to draw up the loan agreement, put a charge on the property etc or do a more informal agreement?

The main pitfall is what happens if you fall out with your son, would you issue court proceedings against him to repossess his home? Obv if you've done the informal route enforcing the debt would be difficult. What would you do if his plans dont come to being and he ends up on NMW with no hope of a £285,000 mortgage in 7 years time?


Personally, lending between friends and family should always only be done to the amount you'd be happy to write off. Whilst many think their bonds are unbreakable and "it would never happen" there are many parent/child relationships I've seen broken because of life choices or choice of partner(s) etc etc 

It would be a formal agreement. As harsh as it may sound, if I did have to enforce it, I would. On the other hand, my wife may more reluctant. 

We've given him a great start in life, he's benefitted from a private education, we've given him a nice car (still legally mine for the time being) and we've built up a nest egg for him in his Junior ISA. We'd be bitterly disappointed if he threw it away, hence why we'd go down the formal route.

GazaEDI

silvercar said:

Firstly, lending to family can be risky if things don’t go to plan. Can you afford to consider this money a gift? If not, I would steer well clear. Otherwise you have no back up plan if he isn’t in a position to repay you as planned. Hat happens if he wants to go travelling or further studies? What happens if his future work takes him to a different area? Would you act as landlords?

Secondly, he loses first time buyer status on this property, he may regret that in the future.

Thirdly, in my opinion, students don’t make good landlords, I’m not even sure they are responsible enough to manage a home at that age!

Financially, if you charge him interest you have to pay tax on it. If you have a ‘shared appreciation’ I’m not sure if it would be income tax or capital gains, but it would be taxed in some way.

What happens if you need the money and he can’t get a regular mortgage?

It would never be a gift, hence why there would be a formal agreement between us. We are unlikely to need the money for a while so would be open to renegotiate any agreement. I had considered a clause in the agreement that should the property no longer be his main residence then agreement would be subject to renegotiation. 

He's going to Uni about 7 miles from where we live, so we'd be keeping a close eye on the property.

Emmia

Personally I think the halls of residence is one of the great things about uni, along with making arrangements for your own (rented) accommodation in later years. If you don't fund this purchase, what accommodation options does he have available?

Whilst I can see the attraction in buying a house via your son for him to live in, you're foisting quite a lot onto his shoulders (does he want to be a landlord for one of his peers?) and removing a means by which he can learn to stand on his own feet.

Also, what if he decides the course isn't for him early on, or decides he'd prefer not to be 7 miles away from his parents, risking bumping into them... You'll end up with a property with a tenant that you've not chosen.

I picked a Uni close enough to go home from if I needed to, but far away enough that my parents wouldn't just drop by.

la531983

Nothing to add to the above although as per the post above, I would suggest he goes into halls for at least the first year, just for actual life experience, and it would be by far the best way of making friends whilst there. 

Jemma01

I'm a little unsure here. If your son is only 7 miles away (20 mins drive) why do you need to buy him a house? This is a lot of meddling around. I used to go to university 7 miles away and despite the awful traffic that doubled the distance, it was still do-able.

He's losing on a chance of having a cheap first-time house in the area he and his partner choose, who may also have a child to pay for, because you want to save yourself that payment? His future house might be in another city. It makes little sense to take that opportunity away just because. If you want him out of the house, let him grow up and try what life is like away from your decision-making.

If your son decides to not go to university that's his choice, he's not throwing anything away, I'm sure he appreciates your help, he's choosing his way in life and about time you stop controlling his choices and let him be what he wants. You're making so many assumptions and even assumptions about his lodger mate paying anything and not trashing the house!! 

Flugelhorn

GazaEDI said:

We've given him a great start in life, he's benefitted from a private education, we've given him a nice car (still legally mine for the time being) and we've built up a nest egg for him in his Junior ISA. We'd be bitterly disappointed if he threw it away, hence why we'd go down the formal route.

really appreciate that you are trying to do the best for your son but sometimes this can put too much pressure on their shoulders. Mine had some private education, all accommodation paid for at Uni - lots of help with rent later, and  both had newish cars that were "mine" but as soon as they passed the test I put them in their names - it was all  gifts, no strings attached  and totally up to them what they do with it, I have no expectations and my only disappointment would be if they were unhappy in life. 

Brie

Does he want to own a house and possibly become a landlord?  And will he have the ££ to pay all the other bills?

Gifts from parents, however well intended, can end up being very expensive for the recipient.