Would there be a way of helping a friend with a mortgage?

Nelson1100

I have a longtime friend who's recently got divorced, her husband left her with very little other than signing over the house to her which is worth circa £575k. The mortgage was in the husbands name but it was an old endowment type that has now ended and once the lump sum has been paid it will still leave about £130k owing on the house. For a number of reasons she can't get a mortgage so the obvious thing to do would be sell and downsize but because of family commitments she's keen to stay in the area for another 5 years and there's not much for sale locally that would suit her.

I have savings in various building society accounts getting about 4.5% interest at the moment but that's obviously going to start dropping once the BOE start cutting base rates and my friend has said she'd be happy to give me 6% on £130k for the next 5 years plus a % of any increase on the house price in that time. She works so has the means to pay the interest but I'm wondering where we'd stand legally? Technically I'd own a quarter of her house until I was repaid so is this going to be a legal minefield to tie up? What would need to be done in case of her death or loss of her job? Would it count as a second home for me? How could I ensure I'm paid after the 5 years?

 Do you guys think its worth it or would it be more hassle than its worth?

user1977

Nelson1100 said:

Technically I'd own a quarter of her house 

Why would you own any of it? You could just lend the money in the same way as any other mortgage lender would, with a charge registered over the property to give you security.

Nelson1100

Any idea what registering a charge on the property would cost?

se2020

Fairly straightforward to do a private mortgage. 
Solicitors fees will be about the same as a normal mortgage application. 
You just give them the details to fill into the standard forms.
Obviously the existing mortgage will have to be paid off via the solicitors as the mortgage company won't like you adding a charge to the property as well
Probably an extra cost to add in the part about you getting a % of any house price increase. 

Private mortgage lending is not uncommon. 
However,  it's normally done (outside of family) because the house is not suitable security for a regular mortgage. 
I'd be very careful that the "number of reasons she can't get a mortgage" don't end up being reasons she can't pay you back.

Voyager2002

Nelson1100 said:

 Do you guys think its worth it or would it be more hassle than its worth?

For you, it would be a lot of hassle for a six per cent return.

For her, of course it would mean that she could stay in her home at a cost of about £8,000 per year, almost certainly less than it would cost her to rent a family home. So worth it for her, and that might make it all worth it for you depending on how you value the friendship and her well-being.

In order to protect yourself, you would have to insist that your friend insures her life (with you named as the beneficiary) and also takes out insurance against unemployment, again with payments to be made directly to you. (This is important because if she were to be living on a means-tested benefit, her benefit would be reduced by the amount of any unemployment insurance payments that she received, even if she were paying them directly over to you.)

I shall give you a horror story about how this kind of thing can go wrong: some years ago, my father's friend (a self-employed builder) faced repossession after he got into a confrontation with his mortgage lender. (I think he refused to pay some charges that he felt were unfair, and of course the inevitable happened.) So it was done properly, with my father paying off the outstanding mortgage, agreeing a realistic payment scheme, and taking the house as security.

Anyway, the "friend" decided to stop making the payments, stalled until everyone got totally fed up, and in the end my father had to go through the court process, repossess and sell in order to get his money back. Along the way he had to deal with an unreasonable amount of threatening and insane behaviour.

TheSpectator

Personally I would say it's bonkers to consider this. Only do it if you can afford to lose the money or are prepared to wait years for it.

user1977

Nelson1100 said:

Any idea what registering a charge on the property would cost?

Very little in itself, but I'm guessing you may want assistance in drafting a loan agreement. Not something there's going to be a standard price for (and potential legal costs for both you and your friend if you both want to be lawyered up).

Nelson1100

Yes this is all very useful information, (even the horror stories) I hadn't even thought about life insurance etc. I think for the difference in what I'm earning already vs the risk of it all going south it might not be worth doing. 

user1977

TheSpectator said:

Personally I would say it's bonkers to consider this. Only do it if you can afford to lose the money or are prepared to wait years for it.

And/or are prepared to evict your friend and repossess the property to get your money.

FlorayG

Legally you can do it
Morally I wouldn't even consider it. I know so many people who have lent large sums to friends and then lost it
Shakespeare; "neither a borrower nor a lender be, for loan oft loses both self and friend"
He's so right

Bigphil1474

OP, to be fair, if you are charging interest and getting a share of any increase in property value, then you are doing far better than your savings account pays. House prices are predicted to go up by as much as 20% over the next 5 years (obviously this isn't guaranteed). If they did go up that much, your 22.6% share of the property would go up from £130k to around £156k as well as the 6% interest return - quick maths would suggest that's in the region of an extra 3-4% a year on top? There's a risk the house might be worth less, but I'd say that's unlikely unless it's a pit.
. 
Personally, it would depend on how close a friend this is. I can only think of one friend I would consider doing this for, if I had the opportunity. Could you pay off the mortgage with a view to her down sizing asap as opposed to waiting 5 years? She could be mortgage free and pay you back within a year, even if she has to move a few miles away and buy a car.