BUY, SELL or RENT (Dad's bungalow) DILEMMA

studiollij

My sister and I are the 'near future' benefitiories of the bungalow where our father has lived. Dad has offered to sign it over to us now and doesn't like the fact that it's sitting empty.
My husband and myself have built an annexe on to our home so that I can care for him as he has dementia and cancer (he is 88). We used our life savings and my husband's retirement pot to do this, partly as an investment. Dad contributed £10k towards the annexe and has £10k left to give to my sister at some point. He has settled very happily but sadly his life expectancy is only a couple of years or so.
Pat ( 59 year old sister) is in a pleasant, small one bedroomed flat which is currently on the market at £115k (just reduced from £120k) but very little interest at the moment. She has about £69k equity with another 5 years to run on her mortgage. Her husband (also 59) has a pension pot of about £30k at age 65.
She would dearly love to be able to buy me out and live in Dad's old bungalow and we are desparetley trying to find a way for this to happen in a fair and proper way.
We (on behalf of Dad on his request) put his bungalow on the market (£249k) back in April but withdrew it when my sister thought that it may be possible for her to purchase it somehow.
The biggest problem seems to be that Dad took out a lifetime mortgage with Norwich Union in 2002 (for £30k) This now stands at about £46k and is increasing at an alarming rate of several thousand each year.
Norwich Union have agreed that because of Dad's need for full time care the loan could be repaid early with no penalty charge.
If there was no mortgage on the property we could rent it out (approx £800 per month), then meanwhile Pat could be saving to add to her capital towards my future share. I would be happy to wait five years for it if it means that Pat has the bungalow.
If her flat sells at a fair price I think she may just manage it.
She looked into a Let to Buy mortgage (on her flat) which looked fine until it came to the fact that she would have to remortgage the bungalow and go on working well into old age! She would like to leave a reasonable amount to her two sons when she dies.

This seems to me to be a very complex problem (complex for my sore brain, anyway) and I'm hoping there may be someone out there in moneyland who can see a straight, flashing arrow pointing to a brilliant sollution that we have completely overlooked.

Many thanks to anyone who reads and considers this problem,
Jill

EdInvestor

Dad could raise a new BTL mortgage on the property to pay off the NU loan, and then rent it out, using the rent to cover the mortgage interest (c3.5k a year, so there would be additional profit). This would give time for sister to sell her property and might well be a good idea to look at on its own.

But it's still going to be quite a jump for her to finance the deal so close to retirement and apparently without much in the way of savings.

It might be a beter if you sold the house when Dad dies ands then she took her half share in cash and invested it to boost her pension, staying in her current more modest accommodation or something similar.

franklee

I don't know how the NU lifetime mortgage works but taking what you said about it at face value, that you can repay early with no penalties and the amount owed is increasing at an an alarming rate of several thousand each year. Also taking into account that the housing market has turned and house prices are likely to fall I'd suggest that you and your sister agree to sell the bungalow on the open market asap.

If you hang up to the five years to see if your sister can raise the cash then the value of the bungalow will have fallen and the mortgage increased putting a squeeze on what will be left over from both ends! You should at least calculate how much the amount owed to NU will be over the next few years, can you ask NU for a forecast?

So why not put a sensible deadline on your waiting for your sister's flat to sell (say six months) yet also put the bungalow back on the open market now. That way you can gauge the market. If you get a good offer on the bungalow you can decide then if you wish to accept, if the flat sells first then your sister can buy. If you sell the bungalow sooner rhather than later dad and then sisters get more and your sister will have a nice deposit for when she starts looking at other bungalows to buy probably at much less than they are going for now.

Edited to add:

Also if the bungalow isn't sold then when your dad dies NU will want the loan paid off. How long do they allow for that? With the figures you state you will need to sell to pay the loan, and this may happen before the five years you mentioned to allow your sister to save up. So how will you pay off the loan? If you do not pay surely the bungalow will be repossessed? I do not see how you can wait five years ...

studiollij

Hi ... thanks Edinvestor and Franklee,
I should have mentioned that we have only one year (until April 09) from when Dad vacated the property to pay the Norwich Union. Although, having said that I understand from a phone call I made to them this morning that they may extend that under these circumstances.

franklee

studiollij wrote: »

Hi ... thanks Edinvestor and Franklee,
I should have mentioned that we have only one year (until April 09) from when Dad vacated the property to pay the Norwich Union. Although, having said that I understand from a phone call I made to them this morning that they may extend that under these circumstances.

In that case you need a plan to pay the loan off by then, if you don't sell how would you do that? It sounds like your sister can't cover it so would you be able to raise the 46K + interest racked up? If not then I see a big flashing sell sign ...

margaretclare

If there was no mortgage on the property we could rent it out (approx £800 per month), then meanwhile Pat could be saving to add to her capital towards my future share. I would be happy to wait five years for it if it means that Pat has the bungalow.

When you're in contact with Norwich Union, couldn't you ask them whether they would agree to the property being rented out? AFAIK most mortgage lenders will agree to property being rented, as long as they are told.

Also, if you're too worried about the interest rolling-up, it is (again, AFAIK) possible to pay the interest off each year, in the same way as an interest-only mortgage.

It would be nice for Pat to live in Dad's bungalow, wouldn't it? Her flat would probably sell - in normal conditions, that is! Nothing is moving at the moment - nothing where I live, anyway. A lot of properties are advertised for rent around here, ones that would have sold just a couple of years ago, not now.

I understand about Dad not liking the bungalow sitting empty and neglected. You can always tell the ones that are empty - grass uncut, weeds growing, paintwork flaking. They look so sad, and obviously money will need to be spent eventually, to repair the ravages of time and weather.

franklee

If renting out it would be worth comparing the NU interest rate being charged against any BTL mortgage that could be used to replace it. It would seem more sensible to get a BTL mortgage as EdInvestor said.

But renting out can be a hassle, it all depends if you get good tenants or not and a good agent. If the market was rising then worth the risk, but we are now in a falling market so holding on makes little financial sense.

It's still dad's so really needs the best for him first, will he ever need the cash? Would he rather pass on more cash to his children or keep the bungalow in the family with the possibility of a considerable financial loss?

bandraoi

Accepting all your figures without a glance at the current housing market and excluding buying and selling costs:

There is about £200,000 of equity in your Dad's bungalow.
Of which you're entitled to £100,000 and your sister is entitled to £100,000.

Your sister will have £100,000 from your Dad's house.
Your sister will receive £10,000 upon you Dad's death.
Your sister will have £69,000 from the sale of her house (est)

The maximum total your sister will have is £179,000 to play with.

Your Dad's house is worth £249,000, which means she needs to raise a mortgage of £70,000 (the difference between what she has and what she needs). At her age, and with so little savings that would be craziness.

You potentially could gift her some of your share of the house, but I'm not sure that would be helping her much in reality.

margaretclare

Well, that £200,000 of equity is not set in stone, is it? What happens if prices keep on falling? That amount of equity could quickly decrease. The possibility exists for any parent to sell a house below its market value, if that's all a son or daughter can raise.

We (my late husband and me) did a similar thing back in 1990.

franklee

margaretclare wrote: »

Well, that £200,000 of equity is not set in stone, is it? What happens if prices keep on falling? That amount of equity could quickly decrease.

I re-ran bandraoi's calculation having devalued both Pat's flat and dad's bungalow by 30% to account for house price falls if they wait a few years (30% being my best guess it's worth trying others). Without taking into account any rental income or increases in the loan or interest payments on the loan it leaves Pat in pretty much the same position of having to raise 70K should she sell her flat and buy dad's bungalow. But it leaves studiollij 40K down on the amount she stands to inherit from the sale of the bungalow.

margaretclare wrote: »

The possibility exists for any parent to sell a house below its market value, if that's all a son or daughter can raise.

Of course Pat could sell her flat at current market value and then be allowed to purchase the bungalow below market value but that would require studiollij to give up some of her inheritance in favour of her sister. I thought from the OP that the sisters were wanting to be treated equally but of course that isn't necessary if the family prefers otherwise.

SquatNow

While I hate to bring it up, what about IHT?

Wont the OP and her sister have to pay IHT if their poor old dad snuffs it in 2 years? The maths will get complicated... they'de have to calculate the value of the house as the time of death, deduct NUs cash from the value of the house and pay IHT on the difference?

There could also be serious legal complication if their Dad needs residential care and they couldn't afford it... NHS wouldn't pay as he would be deemed to have disposed of an asset.

I would have though the best plan would be to sell the place and the father gift them to their maximum gift limit each year (Agreed and signed in advance with witnesses etc) that way there would be a pot of cash to pay for any residential care needed and the leftover cash could be split up at the end an IHT paid with it?