Parents offered us chance to buy their property,is it worthwhile?

leonie_2

Hello everyone

My husbands parents have decided they want to release the equity they have in their house and have contacted a few places to enquire about it.

They have decided to go ahead with a scheme but have offered it to us for the exact same deal first and I wondered if it was a worthwhile investment and what do I need to think about.

Basically, they have offered it to us like this. They want £6000 up front and then monthly payments to them of around £275. This works out that we pay them £39000 for the property. Which is worth around £80000.

Now we would need to get a loan, but also to consider what is the best way to find £275 per month.

What are people's thoughts on this please?

Many thanks

Leonie

calleyw

So while you are paying the money who's names are the deeds?

Because if it is your parents what happens if they need care and the house is to be sold. I am pretty sure you would get nothing.

Also not sure what the implications are of giving them £275 a month would be in tax terms.

I you need to think very carefully about this and get all the legal advice you can which means you are going to have to pay for that.

Yours

Calley

cattie

If you are not 100%sure you can comfortably afford & manage the payments on the loan for the £6000 plus a regular £275 month for your parents then in fairness to them you shouldn't consider it. If they are considering an equity release scheme, they obviously want the security of a regular monthly income on top of the initial lump sum & if you were to get in financial difficulties & be unable to pay, then how would they be able to manage? Think things through very carefully before making a decision & as suggested by calley you'd need to get legal advice too.

System

I personally wouldnt do it. Business and family very often doesnt mix and i say that from bitter experience.

leonie_2

Thankyou everyone, lots of things to think about there, especially the deeds thing. I dont know what to do, it just seems bad that my hubby (their son) wont get any money and someone else will profit.

At the end of the day though, there are a lot of things against these family deals and we really cant afford to lose this kind of money.

Lots of thinking to do methinks

Thanks again

Tim_L

It is well worth seeing a solicitor to go through the options that are available, even if you have to pay a few hundred pounds. There's also some info on equity release schemes in the consumer section of the FSA website:

http://www.fsa.gov.uk/consumer/equityrelease/index.html

Probably the decision to go for an equity release at all is worth revisiting. These schemes are very persuasively sold, but worth going through with an independant expert.

leonie_2

Thank you Tim_L

Well they are set on doing it as they want to maintain a good lifestyle. Whether my hubby will be buying it instead is another question, it seems riddled with difficulties :-/

Thank you again

Tim_L

I don't honestly think there's any way of doing this deal yourselves (but do take professional advice, and try to persuade the aged P's to do the same to ensure they're getting the best possible deal - there are some massive potential pitfalls with some equity release schemes).

Basically the parents are choosing to spend their own money on themselves - this is perfectly reasonable in my opinion. But in doing this they are using pretty much all the value in their house, and there really isn't anything left to pass on.

In effect, what the company offering the equity release scheme are doing is buying an annuity based on the value of the house, taking immediate ownership of it. Because they can't actually release the value in the house until both parents die, this notionally costs them the annuity purchase amount compounded annually at whatever rate they could get on the money by doing other things with it. They will have arranged things across a number of similar deals to ensure an overall profit, but the overall return won't be massive. It's certainly not as simple as multiplying the monthly payments by life expectancy and taking it from the value of the house to calculate profit.

On the other hand if you try to do the same thing you have one go only.If it goes wrong you can't average out over a range of similar deals. So you're having to hope that both die while you are still in profit, which is clearly a difficult situation to be in with relatives. .

And it's not clear to me how this could be made to work anyway, as it's imperative you own the house from the moment the deal starts. You could I suppose buy the house at a slight discount on market value, and the parents could use the proceeds to buy an annuity - they could gift out some of the remainder possibly - this would leave you with an asset that might increase in value, but you'd be paying interest on the mortgage and unless you got very good house price growth you could end up losing out (and would also be liable to CGT when you sold it eventually though you'd probably be able to offset most if not all of this against your allowances). And of course you'd have to ensure the house was kept in good repair throughout, which could be expensive, and there would be some risk of problems if you hit financial trouble yourselves as the house could be repossessed

There are also some risks attached to anything that looks like an attempt to avoid local authority care home fees by selling to relatives and transferring value away.

But, I stress, do get professional advice on this before giving up completely on the idea.

leonie_2

Thank you again Tim

The more I look into this, the more it seems a bad idea. At first it felt wrong that someone else would benefit from the house, but to be honest, its probably for the best as it could be more hassle than its worth.

Pal

If the ownership of the house is changed to the children then the parents would need to either pay a market rent to live there or pay income tax on the market rent that they should be paying.

leonie_2

Thanks Pal

So how come they wouldnt have to pay these things if the house went to a complete stranger?

Its a real minefield!