AIBU to think that we should take out a buy-to-let mortgage for PILs?(38 Posts)
DH's parents need to downsize because of financial problems, it's a highly stressful situation. They are 60 & 62. Basically, they need to sell their own lovely home because they can't remortgage. They have just sold their own house and need to move out next week.
They were told that they had an offer in principle for a £20k mortgage for a £130k property - the only decent-ish place that they could find on that budget - and that offer had been accepted. However, today, they've been actually told that the mortgage deal has been declined.
They mortgage adviser has suggested that DH take out a buy-to-let mortgage for £20k with the PILs giving us the equity from their house sale. He's mentioned something about the fact that they pay DH 'rent' (which I don't understand).
I want us to help, but am concerned about the implications - tax, ability for us to get another mortgage if we wanted to move, what happens if DH were to die, etc. etc. etc. We have a meeting with a mortgage broker tomorrow morning and we need to be prepared really.
Is this likely to end in disaster?? (PILs are slightly useless with finances). What's the implications??
FIL has just landed a 3 month job, which could result in longer term work. However, he is 62 so not going to be working forever.
MIL does not work.
Even if not working, they think they can pay the mortgage with pension credits.
I guess the idea is that your DH would be the legal owner of the house and your in laws would then be the legal tenant and therefore pay rent. This means that anyone they owe money to cannot take it.
You need to have a seriously bad credit rating to get turned down for such a low percentage mortgage.
The risk is more theirs than yours, even so if I would you I wouldn't.
We have a ''dependants mortgage'' on a house for PIL. I think it's with Abbey/Santander.
They gave us the capital we got the mortgage for the rest. We own the house and we will then charge rent to cover the mortgage.
We were told it won't count when we apply for another mortgage for ourselves as they cover the mortgage and we don't need landlords insurance as it is let to 'family' not 'tenants'.
Don't know if that helps at all x
We did this (although bought the house and remortgaged for a considerably bigger sum). It was a nightmare. No rent was paid, so we footed the mortgage every month. As it was "our" house, I and dh were expected to also pay for its upkeep and maintenance although the original intention was to simply allow mil to stay in her house after fil died as if it were still hers. If rent had been paid, we would have been taxed on it as income. When the house was sold, we took advice which told us that not only did we have to pay cgt on it, but it would still be considered to be part of my mil's estate for inheritance tax. I would never ever ever do it again, although suspect you may be in a slightly different position. If you are going to do it, take good advice beforehand on the tax situation.
"This means that anyone they owe money to cannot take it."
I hadn't thought about that sydlexic, I wonder if this is one of the reasons why it's been suggested? As far as I know, their credit rating is good but they do have a default. Who knows though, it's possible I don't know the entire story,
Would this 'income' affect our income tax? Would be need to file a return for this as declared income?
Sorry, only just seen your post Norkmonster. Uh-oh, this is what I'm afraid of. What a nightmare.
Oh, I should also mention that it's a flat. So, would have maintenance charges etc. also, presumably council tax, etc, would come to us??
If they were to go bankrupt then they would need to explain where the money from the house sale had gone. They would be deemed to have a beneficial interest in the house if 4/5 had been paid for in this way. Could you not be the guarantor for the mortgage of £20,OOO and have a % charge against the property?
A buy to let mortgage is going to be a lot more expensive than a normal mortgage. Sounds like you'd be seriously out of pocket. Not something I'd do, and yes you would be liable for tax on their rent.
Hmmmm... What would you do in our situation?
They are struggling to find anywhere in their price bracket.
From next week, they need to be out of their home. Renting a property on a 6 month let or whatever will eat into their capital.
The problem is theirs, not yours.
So they cant buy, they have to rent. When the money is gone they will be entitled to HB or in care homes by then. harsh. But you dont compromise your financial security for people who clearly have more bad debt and are risks then you are aware of.
YANBU but I'd look into the details a bit more
1) you are financially responsible for that 20k, if PIL became ill or couldn't afford to repay would you be happy to incur that debt?
2) it will affect your future borrowing, do you plan to move/remortgage in the near future?
3) will you technically own the property then (on paper)? So what would happen if your PIL pass away? Are there siblings who would object?
As a general rule, I'm always a bit wary lending to family no matter how well meaning. It can lead to disagreements unless clear expectations are drawn up.
Oh yeah buy to let mortgages can be rubbish on interest, so i'd check out what the options are (be a guarantor or take is on as a second property ie a separtate mortgage entirely in your name)
in terms of tax, if their 'rent' payment is covering the costs and you are not making a profit as such you shouldn't be liable for tax.
An independent financial advisor should be able to explain the best options free of charge.
The mortgage advisor will suggest anything to see the deal go through. I think it calls for a solicitor's advice rather than the mortgage advisor. You and DH would own part of the house so the property would be as tenants in common but they would own the majority of the house because they will still be putting up the majority of the funds from the sale of their old house. Do not know what the tax implications would be for you and DH in the long run and you would feel uncomfortable taking rent from them but if you did it would have to be declared. Can the vendors not knock the price down another 20K? They might if they were desperate. If not then I think they should rent for 6 months until they can find a cheaper house to love in. It's horrible for them but would place such a burden on you and your relationship if it did all go horribly wrong. If you had the cash to lend them then that would be different - you could get their solicitor to draw up a contract for them to repay you over so long and not have to have any issue with their house at all. You could try Zopa for a loan - they're better than banks or speak to your bank.
Sounds like a recipe for a complete disaster to me.....stay well clear!
They have spent the last sixty odd years mismanaging their money, and now propose starting on yours!!!!
They don't have to buy, they can rent. The mortgage advisor would most likely sell his own sister for the commission so you can discount any 'advice' he gives.....he only gets paid if they buy, so hardly a surprise that his solutions involve complicated family arrangements that keep his income stream.
No is a complete sentence
Yes, you are counting on them paying the rent to you. I'd proceed very very cautiously. Can your MIL get a job.?
So does this mean they have 110k to put towards a new property?
I'm quite sure they could find a property for that, even if they need to lower their standards a bit
I wouldn't mix money and family - I once lent my dsis £200 (I was 19 so was a lot to me then) and never saw it again so I don't bother now
I wouldnt do it. My PILs are in a similar position but i would not be willing to consider jeopardising my children's stability for anybody and money is high up on the list of things i worry about.
My MIL sold her house about 7 years ago (she & FIL were divorcing after years of separation, & she wanted to move nearer to us).
She has a similar amount of equity in the bank.
She rents a perfectly OK two bedroom terraced house - her choice, she moved from South-West to Yorkshire so her 'half' of her marital home would have bought somewhere similar to the house she lives in outright.
Even discounting the interest she receives on the balance, it'll cover her rent for quite a number of years...
I think your DPIL might need to consider their options & get some independent advice (as should you). At the very least, they could rent for six months whilst they house-hunt.
Can you get a personal loan for £20,000, give the money to the ILs and then they can pay you back regularly? Then you avoid all the tax/inheritance issues...
Sorry but that is a truly awful and shocking idea! What if the (already financially suspect) in laws don't pay? They are proposing to use their pension credits FGS!!!! That is money they will need to live on. If they are going to be in receipt of those (means tested benefits) they certainly won't have the funds to pay back a loan. Guess who that leaves in the lurch?
Could you suggest the plan would work better for all/might be a goer if MIL got a job?
I can see mentioning this might be agony on the tact front, but if PIL don't pay you, you're looking at housing the couple for 30-plus years, which might make one a little grumbly when the wife, at least, is lady of leisure.
If they are suppsoed to be paying rent to you and suddenly cant afford too, would they be able to get HB to cover the rent? there used to be rules that HB wouldn't be paid to a family member.
Yes you need legal advice on what happens now and also what could happen if they mismanage money again
If I understand correctly... the PILs need to borrow £20k for a house costing £130k... this means they'd have a loan to value ratio of 15%. Surely a mortgage broker would/should be able to find them a that loan from somewhere, even with a slightly higher interest rate. That would be a mortgage advisor, not a financial advisor. You easily find mortgage advisors located in offices of the large real estates. They are independent of the estate agents though. They are free because, just like financial advisors, they get their money from the banks and building society.
As for the other scenario, if you get a buy-to-let then you would own a percentage of the flat (15%). If they were paying you 'rent' then you would only pay tax on any money above the amount of interest repayments as these are tax deductible. You would need to declare to the tax office, but wouldn't actually pay tax if they only pay equal to the amount of interest. Any extra that goes towards paying the capital would be taxed at your personal income rate. I also believe that service charges for flats are tax deductible too. Capital gains tax is a real possibility, but that only comes off the profit made from the sale, not the total value.
Do they intend for DH to inherit this flat? £130k (actually £110k) is not going to bust the inheritance threshold by any stretch of the imagination unless they have another mansion somewhere.
The biggest issue is the whole lending money to family and getting caught up in unpleasantness. Money and misunderstandings have ways of creating big problems. Discussions need to be held and a solicitor needs to put whatever is agreed into a proper contract.
Hi, if you want to PM me (I'm a mortgage adviser) I'd be happy to give you some advice regarding this - it's unlikely you could "buy" the property if your in laws are to remain in the house they would continue to live in as legally it is presents a minefield. Way too complicated to get into in a brief message so do send me a message if you'd like to discuss this further
Sorry - just re-read your OP - you're looking to buy a property for your in-laws to live in, not buy the one they currently live in - sorry! Much less complicated but again if you'd like some (free! I'm not touting for business!!) advice I'm more than happy to help.
Sorry, should say that age will be a negative for them, but mortgage advisors have access to a lot more deals than the general public has direct access to. They might still be able to sort this for themselves. If they don't make the payments, then they'd have the bank to contend with and their relationship with their family can remain intact.
Sounds like a good idea to chat with Vino.
For so many reasons I wouldn't even consider this.
You would effectively become their landlord and have to do everything a landlord would have to do by law. The money they pay you would have to be declared to HMRC and would be taxed accordingly.
Not even sure if you can get a buy to let and let to family members. Some mortagage providers won't let you do this.
The mortagage advisor doesn't have to live with the consequences of this decision, so easy for him to say.
Sounds like a good idea to chat with Vino.
Thanks for all your comments. It's been incredibly helpful to read all your POVs. I've shown DH the replies and we have decided that we are going to cancel this meeting tomorrow with the mortgage guy.
Potentially, it could all turn rather awkward and I would hate that. It's also a massive burden from a liability perspective - tax, legal. Ugh! I can do without that really - as much as I love ILs.
Don't rush into anything here. They can rent or in the very very worst case they could crash with you. Both are preferable from your point of view then getting stuck with a great big debt.
Sort out the immediate future, i.e. find them somewhere to rent and then have a relook at the mortgage situation.
Don't be pressured into anything.
It does sound really complicated and not something you should be rushed or pressured into by next week. Cancelling the meeting is probably a good idea.
I don't think they can just 'give' you the money they have to put down on a house. There are tax implications of them giving you money which could give you problems in the future.
In your situation I'd get proper, independent advice from a solicitor and financial advisor and have a good think.
Sounds wise. Hope things can work out for them.
if you can afford to lose 20k, go for it. but either take the 20k out of your own home or borrow it elsewhere.
it seems uneccessarily complicated to do otherwise. suspect the mortgage advisor is offering solutions they can sort out, rather than looking at the biggerpicture
We had a buy to let mortgage for a while, we bought a house to renovate and let out but ended up selling ours and moving in. It was very clear in the terms of our buy to let mortgage that we could not rent to family.
Your situation is a potential minefield, make sure you have good legal advice and check out what you would be liable for.
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