PIL want us to buy their house

[Gogodonu]

Anyone have any advice or experience with the following situation
My PIL are in their early 70s and in good health, they are struggling with cost of living increase and although mortgage free have ran up some debts and just not managing to live on their income well. Their only source of income is the state pension.

Their home is worth approx 220k. They want to either do an equity release or for us to buy their home and they pay the mortgage on it. We have reservations about the second option encase they spent all the money and couldn’t pay the mortgage.

Does anyone have any experience with this?

Thanks

It sounds like they have made bad financial choices for a long time if they both worked and neither of them has any form of private pension. Now they are trying to take their DCs and DGCs financial security.
Don't engage in anything which involves them paying you back. Long story short - they won't. If they are amenable to it, worth going through their bank accounts to check what outgoings can be trimmed. Even if they did downsize, suspect they would work their way through the funds quite quickly.

I know of one instance where a couple bought the parent's house and bailed the parents out of the financial mess they'd got themselves into. It worked, but only because the couple imposed some really strict conditions, including managing all the parent's finances to ensure their bills/utilities got paid and the money didn't get spunked away in the same way as their savings and their rampant credit cards. They said it was like managing obstreperous teenagers, and despite transferring a generous monthly allowance into their current account for "spends", they still managed to go through it in a couple of days and spent the rest of the month pleading poverty.

It was a lot of hard work and it was a difficult relationship with their parents to start with, but it worked because that way their parents kept a roof over their heads and the couple didn't have to worry about the parents wanting to live with them. They did it all properly with solicitor involvement, Power of Attorney over the bank accounts, rent agreements etc, and when their parents died it actually made a lot of the probate stuff very easy, as they already knew the state of the finances and there were no siblings. Apparently they found out one parent had a history of this, and the parent had been bailed out several times when younger by their own parents and siblings, which the couple never knew about until they stepped in this time.

So it can work but you have to be prepared to follow it through. And be prepared for the long haul if the people involved are only in their 70s.

Who do they owe money to?
What have they been extravagant on?
Why are they in debt?
Where can they cut expenditure?
How likely are they do to this?

Honestly, I wouldn't get embroiled in their mess. They are clearly not very good with their own money...what makes you think they'd fair any better with yours? Steer well clear.

What if they die before the mortgage term is up ? You are left with it ?

Equity release can come back and bite you/them on the bum. The adverts promise a land of debt free milk and honey. I suspect its not quite like that.

So You buying the house from them, they living in it and pay you back. They pay off debts and with what ever is left repay you a diy mortgage. They’ll also continue to spend as before as they’ll have lots of money burning a hole in their pockets.

Do this - but only if you can afford this.

Their income 2 x state pension = about £400/week + any other pensions.
Once one dies the income will drop significantly.

May be help to pay off the debt/some of the debt AND suggest they attend/work with a debt help group. AND set up a repayment plan.

Once retired most of us can’t afford to live as we did pre-retirement - its not clicked with them has it?

All the best with this.

They have an income of around £23k a year with no mortgage or rent costs and can't manage?

What are they spending their money on?

The Op will need to buy it at market value plus the extra stamp duty / ADS.

If the Op owns the house and lets it to the PIL, she has to pay income tax on the rental income , she can’t deduct the mortgage costs . That might put her in a higher tax bracket or lose child benefit.

she will also have to pay CGT when she sells it.

are their other potential beneficiaries of PIL who might be unhappy with this arrangement ?

The Op will need to comply with all of the 150 odd laws that apply to landlords. Will she be willing to maintain the property at the standard that the PIL might wish? what will she do if their central heating breaks down when she’s on a holiday or they lock themselves out ? Does she have a team of trades people to deal with this?

if the PIL stop paying rent , will she evict them?

I don’t think you can get housing benefit if your landlord is close family , she would need to check.

They need to sell through the usual channels and downsize to a smaller property. Avoid retirement flats like McCarthy and Stone though as they are an absolute money pit with service charges and impossible to resell. You could help them with that process, but I really wouldn't get involved with buying the property of mixing finances/relying on them paying you rent. These things can all go very wrong.

I am thinking that a smaller property would have lower bills and the extra cash from the sale would help with debts. I think you need to go through their finances and make sure there is nothing untoward. My mother was the victim of a scam that was costing her a considerable amount every month. We knew nothing about it until she said she wasn't managing.

It would be a no from me too , they need to look for other options …

I'd have to agree it was not living within their means that got them where they are, how are they going to pay a mortgage if they already can't afford the cost of living? I hate to say it but both their suggestions seem more about having their cake and eating it. It they downsized they could live extremely comfortably and still have lots of money to play with. Ok they worked hard all their lives etc etc..but their circumstances have changed now, they can't afford the property any more and the solution is not to make it their children's financial burden or release equity then spend it so they can't afford their own potential care fees when it's gone. They might be fit and healthy now, but so are most people who have an unexpected stroke.

None of the math here make sense going with the option of you buying it, as currently average uk mortgage rates exceed even the higher interest rate you would get if they had a lump sum to lock away - which they actually couldn't do as this lump sum would need to be accessed to pay their debts and pay you the mortgage and so would be decreasing . Interest rates they would get are hardly matching inflation. If they were lucky they could maybe get 4- 4.25% interest on their lump sum, but the mortgage would cost more like 6-8% - and that's before you add in extras like solicitors, conveyancing, stamp duty, your annual tax bill - the cost to you of the deposit,

The grasshopper and the ant come to mind.

my financially savvy friend advised his inlaws to go down the equity release route rather than get into complex financial arrangement with family.

His argument was that the in laws had made the money to buy the house, so they should be the ones to benefit from it with as little stress as possible. Their DC were all adults owning their own home - would they have liked an inheritance? probably, who wouldn't, but they did not feel entitled to one.

I went the other route and sold up and downsized to a 2 bed bungalow from a 4 bed family house. I got enough equity to boost my very modest pension for a good few years. If I run out again then I will downsize to a one bed flat....

The stress of the physical upkeep of a large home also has to be taken into account - someone has to keep on top of it, in my old family home something always seemed to need repairing.... If you own the home @Gogodonu it will end up falling to you.

If I trusted my parents to pay the mortgage and I was able to, then I would buy the house and take out the longest possible mortgage so that their monthly payments were lower and it was therefore less stressful for them long-term.

Obviously there are certain considerations to bear in mind. If the property is in a rough/declining area or there was another reason the property's value may decline for instance then it wouldn't be wise.

state pension is nearly £1600 per month for them together? Are they struggling to pay bills and put food on the table with that!??

They are spending beyond their means despite having a reasonable income and no mortgage.

They are adults, and from what you say able to make their own financial decisions, even if they're a bit rubbish at it.

They want you to bail them out financially whilst they carry on overspending - don't do it.

At most, suggest they look at downsizing and debt consolidation - send them links.

Otherwise unless they're suggesting it's time for you to take on a POA for finances, I would leave them to it.

This does assume that they are not helping you out financially and have not done so in the past (this includes being free childcare) - this would change things as I think you would then have some reciprocal obligations.

No. Because they are clearly mismanaging their finances and you can’t trust them to improve.

State pension gives them 11.5k tax free each, so a total of £23k net. What are they doing with it?

We had a similar issue with my parents. Unbeknown to us they had already taken an equity release loan ! In this situation we moved them into assisted living for the over 55s where they purchased 75% of the property and do not have to pay rent etc. on the remaining 25%. The cost was much less than the value of their house so we could clear the equity loan and they released some funds (not too much though) to help with cost of living. There are certain conditions attached to this type of purchase but might be worth investigating.

The problem with an equity loan is that while your parents get the cash and don’t pay it back or interest, interest continues to accrue which means any remaining equity gets “eaten up” over time. If you needed to move them in the future into assisted living the funds may no longer be available and if they have to rent they may struggle to pay it.

You buying the home is fraught with tax implications and I’m not sure how they could afford to pay the mortgage if as you say they can’t afford to live now.

It’s tough but better to tackle it now rather than wait until there is a crisis , say when one passes away and suddenly income is halved but bills stay the same there is no way they would be able to stay in the existing home.

If they are in their 70s they may well be on the lower state pension. Also, only about half of people ever qualify for the full state pension. It's well worth ensuring you've paid enough NI contributions to qualify.

However, if that were the case I'd expect them to qualify for top up benefits. There's a lot of information missing here OP, are you sure you fully understand their financial situation? I think the advice to steer clear of mortgaging on their behalf is very sound. Please don't be guilted into unwise long term commitments.

Is this a new situation, or have they been profligate in the past? That would greatly influence my attitude to trying to help them.

Equity release is a good option if they need cash now and understand the implications

@Gogodonu

I'm in the US so I don't know how UK mortgages work in detail. Could they refinance for a lower interest rate or a longer term of repayment?

But I'm curious, what would be the point of them selling to you if they're going to continue to pay the mortgage? If they can't afford it now, how would they afford it after it's been sold to you? Wouldn't the mortgage payment actually be more due to higher interest rates on home loans and/or the 'new' mortgage loan amount being higher than the amount left on their current mortgage? Where would your down payment come from? Again, my thoughts are US-centric as far as how mortgages work here.

You don't say whether or not you are buying your own home, but I assume you are. I wouldn't take on ANY debt that I wasn't easily able to repay should the need arise. So unless you can afford two mortgage payments my answer would be 'no'.

@Aligirlbear as I posted a while back- there are lifetime mortgage equity loans these days where you can pay just the interest so that it doesn't roll up and equity isn't eaten away- it is only paid off when last person goes into care or dies.

They could draw enough down to use some for the monthly interest payments and some to clear debt and give them a surplus in bank- but it's all relevant to how much their actual debts are as OP hasn't said- if they drew down £80k they would have interest payments of around £500 a month - say they have £14k of debt - that would leave them £66k in bank and repayments of around £5k a year in interest - it's doable - but only if they reign it in- depends whether the debt was incurred due to actually having debt or if it's one of them wants a holiday 4 times a year etc. it can be changed too at any point to interest not being paid and going on roll up- maybe that's something to consider if they are in their 80s -

I don’t think you can get housing benefit if your landlord is close family , she would need to check.

They wouldn't be able to get housing benefit because they'd have deliberately entered into a tenancy in order to get housing benefit. And if they'd "sold" their house to the OP, they'd have capital above the £16k threshold at which HB eligibility stops.

They couldn't even spend the money, because then they'd fall foul of the "deprivation of capital" rules.

I think the only answer is for them to downsize and free up equity that way. And when they do, they need to look carefully at service charges if they buy a "retirement home" or a flat, because they may make them even worse off than they are now. (I'm a pensioner, and have been looking into downsizing. Some retirement places have service charges in excess of £8k pa, and even ordinary flats are often over £2k pa.)