AIBU to take all the equity?

[HalfwayCrook]

So DM (working, healthy, in her 60s) has always been terrible with money and has a lot of debt hanging over her. The family home which has been on a 100% LTV interest only mortgage is coming to the end of its term next year and due to her age she will not be able to get a re-mortgage without getting involved in some dreadful equity release scheme or some such.

There is no question of downsizing or selling the property as she will not hear of moving house. The plan I have come up with is for me and DH to buy the family home for the price of the mortgage (i.e. being gifted £175k of equity which has been gained through price rise alone) and to then pay a repayment mortgage allowing DM to live there rent-free. This would mean that the family home is kept, the equity is not lost (particularly to pay off her other debts) and that she would free up significant monthly income by not paying the mortgage to pay off these other debts.

The issue is that I have a sister and I am concerned that she may see this as me taking away any chance of an inheritance? For background, although we have similar salaries she would not have the financial capacity to do this as she has just bought her own house (after living in the family home for 15 years not paying rent, bills or food). When she was looking for properties, I encouraged her several times to buy the family home instead but each time she refused (it is not in the best state of repair however perfectly liveable). As far as she knows, the family house is written off and is to be used to pay off debts etc. Also by DH and I taking this on, it will mean we are unable to upgrade our own home (living in a 1 bed flat) which means that we are taking on a big hit to our personal life e.g. less space to start a family. It has taken considerable stress and research in order to plan this and she would never have put forward this herself.

I feel that if we pay into this for say the next 20 years the proceeds from the resultant sale should be ours? However if by some terrible misfortune DM passed away in the next 5 years I accept that it would be best to share with DSis – perhaps two thirds to one thirds? AIBU?

Thanks lboogy yes rightly or wongly the idea of equity release irks me. Especially as she would probably go for any old scheme even if no equity pay out just to stay in the house!

And in 2 years at the end of the fix you have no idea what mortgage interest rates will be, What base rate will be or if house prices will have dropped.

So who knows what anyone will afford then in terms of additional borrowing.

Or if you do know, please tell me!

Have you calculated the equity left after you pay all associated costs? Including mortgage interest?

I don’t know why people are so fixated on the sister somehow being deprived out of an inheritance. That’s really nothing to do with why this is such a terrible idea.

OliviaBenson it seems unlikely that she would qualify for the mortgage with the debt over her. Maybe if term was ending in 3 years time...I really don't think a 1k+ plus mortgage is feasible on a pension plus would stress her out. She would rather give the house away I reckon and live stress free with no equity/inheritance.

How about this

She mortgages 175k on a ten year repayment
Uses salary, pensions and ‘lodger income’ to pay it. Does she really get 2k pension?

You pay her the xxx a month in lodger income each month in the contracted understanding you are buying some equity.

Then she is paid off in 10 years, you aren’t tied up for affordability and you get 50% off equity when she passes on plus the equivalent lodger income you have paid.

Slithytove yes but if disaster struck on all fronts we can just sell up? I think a scenario of ridiculous levels of negative equity halving house prices is a very low risk I am willing to take!

Yet you are in effect proposing an equity release scheme all of your own that is what you are doing

The real point is though that your Mother needs to get a grip - the best solution for everyone is downsizing. Stop being sentimental over a property neither you or your sister want to live it. The people make the memories - find a new place to make memories in

As an aside my FIL wont downsize or do up his house. Its now not suitable for the children to visit as it is that rundown.

Whatever mortgage rates are 50% LTV on a small mortgage would be the best scenario compared to most anyway.

Hell, put your savings into her deposit to make her LTV better so she only needs to borrow e.g. 155k. Better than paying it in stamp duty.

If anything I think prices will rise on DMs property, lots of investment in the area, new transport links, scope for extension etc

155k over 10 years on house worth 350k on a repayment is £1370 a month

Easily affordable if you help out plus nothing lost to stamp duty or solicitors fees prob

And I bet you’ll find a lender willing to do it

I havent mentioned negative equity
But house prices decreasing affects affordability, you aren’t looking at the big picture. House price drops 10% interest rates rise 3% and fixed term ends - suddenly a 2-bed flat isn’t all that affordable in the eyes of a mortgage company.

Slithytobe thanks for the idea. Yes it would make sense to invest the stamp duty with her in that scenario. How would the lodger income be linked to equity fairly?

DM historically has not touched the house but this month has made a lot of repairs and improvements with a view to staying there for retirement. Surveyor says it is in decent condition and lots of value can be added.

If your Mum made a sensible decision like downsizing then the equity would exist although I understand that you and your sister feel that it will be impossible to persuade her to do that. That would be my first priority though personally. Otherwise had you considered buying a 50% share so your Mum retains 50%? Then she would pay you a small rent on your half which would go towards your mortgage. On her death your sister inherits 25% which is roughly half the current equity but you are compensated by the small rent and by owning the other 50% if the mortgage has been paid off by then. This will also not count as deprivation of assets because her half could be used to pay care home fees if needed, either by selling the house or posthumously.

You would just have to contract that it was a cash for cash basis I think - so if you paid £100k over the 10 years, you get the first £100k (plus maybe whatever the mortgage interest rate was if you were that bothered) of equity.

So ten years, house paid off, mum passes
House worth £400k by then, you’ve paid in £100k
You take £100k plus 4% - £4k
You and sister split the rest - £148k each

Everyone is safer this way plus you get more money

Well how did she afford to do that

You might not even need to claim you are a lodger, but this is an easy and legal way to increase income for your mum without increasing tax - there is a limit as to how much there can be a year though.

Just checked is £7.5k annually.

You are also saving loads in interest. And will have no restrictions whatsoever on affordability when it comes to you and dh to move in a few years. As long as you could save up another deposit assuming you chose to help your mum with it.

Don’t forget as well mum could mortgage now for 2 year fix then remortgage in 2 years when her debts are paid, and her ltv is better as she will have paid off some of the lump.

Though personally I’d be looking at very long fixes in that scenario, 10 years if possible. But that might make interest rates too high.

Op do you mind me asking how much in savings you and mum have combined?

There's surely a piece missing from all this - you don't know what the situation re equity release would be. You are assuming it would be a rip off on the basis of no data.

Surely you need to find out what such a deal would actually involve? And if she wouldn't be able to get anything sufficient to let her remain in her house - as one poster suggested - then your solution is not needed, because she would have to downsize.

This is important re your sister also. I don't think your plan is ripping your sister off (though lots on here do, so why won't she?) but if there is no equity release possibility, then your mother has to downsize, and then your sister's potential inheritance is still there in the equity of the new property, whereas under your plan your sister has no inheritance.

Under my plan they both get more inheritance 😂

Thanks slithytove. I wonder whether the IHT implications are cancelled out by the potential CGT in the OP scenario. Sounds like a nice way to help out DM.

Don't think she is eligible for anything better than standard rate from what we have seen. And that is not taking into account the debt that may put lenders off!

No IHT as under threshold
No CGT as it’s her main home