DM buying a house but me paying the mortgage?

[Sittingawkwardly]

Hey folks! I hope this is the right place for this, apologies for such a long post.

So my friend lives in a home her PILs bought, but which her and her husband pay the mortgage for, on the understanding that they are paying the mortgage to eventually use that money as a deposit for their first home.

I mentioned it in passing to my DM when she asked how my friend was, and she thinks it’s a brilliant idea to get me on the housing ladder.
We simply couldn’t move in with her to save money, as it’s too far away for us and she can’t gift us the money (Which we’d have paI’d back when we sold) as our credit rating is non-existent because I’ve not held more than a debit card, and my DH only has one small CC which he never uses.
We have enquired about a mortgage before, but either the rates were very high or they wouldn’t lend to us.

She enquired about going ahead in this fashion, and has been told it’s entirely possible and the rates are much lower than what we’ve been offered, however due to her age and the fact that she has another home already, (though she owns her own home outright) She’d need a large deposit available.

I thought that would put hold to the idea, however she says that is fine as she has sizeable savings from the passing of my DF, and also from having a successful career.

She is aware that she will have to pay a higher rate of stamp duty if she did buy a home for my husband and I to live in, and we would help pay any legal fees as well as we can.

However my main question (which I will ask her if this plan all goes ahead) is what would happen if she wanted to sell the house to us?
I’m sure she knows what she’s doing, and has sought appropriate advice from her solicitor and potential lenders, but I’m confused.
If she would like her money back in 5 years time for instance, and we wanted to stay and buy the house, how would we access the money in the house which is being saved for this very purpose?
Would there be a way in which we could get the money transferred then buy with that? Or would she have to gift us the deposit money from her personal savings, and then take that money back from the sale of the house?

Any advice regarding the last question (not about the actual idea of her buying and me effectively renting off her) would be greatly appreciated! I know it all sounds messy, and I can imagine people cringing at the idea of it all, but it’s an incredibly lovely gesture from her and at the moment the only way we can move out of our small house with our young son and still save for our own home.

Thanks!

When you pay the mortgage are you buying a share of the property now or are you effectively making her a gift or is it meant to be a loan to her which she will repay? If you buy the property from her you will pay stamp duty land tax and she will pay capital gains tax on any increase in value.

I don't understand what you mean about a low credit score preventing her from giving you the cash. (It isn't a gift though if you need to pay her back. ) That would be the simplest way. If it would give you the deposit now, it could mean the interest rates would be lower.

Google 'Vendor Gifted Deposit'. It looks like it is possible (/was before Covid) but only up to 5%. Don't forget your mum will also have to pay Capital Gains Tax if the house goes up in value.

Have you been to see a mortgage broker? We were offered a mortgage with previous bankruptcy and neither of us have credit at the moment. You might be surprised

her and her husband pay the mortgage for, on the understanding that they are paying the mortgage to eventually use that money as a deposit for their first home.

I don't understand this. How does them paying a mortgage get them cash for a deposit?

@TwoTribes I think the deal is that the PILs pay the deposit, the friends pay the mortgage and then when the house is sold the PILs get back their deposit and everything over that goes to the friends to be a deposit on the next house.

@GOODCAT - It’d be as @milienhaus said above. She’d buy the house, we’d pay the mortgage by paying her, when the house is sold she would get her deposit back for the house and anything over that would be given to us to use as a deposit.

@Sorryusernamealreadyexists We did go to a broker and the rates we got were quite high. DM and the PIL we’re looking to gift some extra deposit to us so we’d have to borrow less, and my husband and I were working on building our credit to get better rates in future. I’m glad you were able to get an offer!

However with me saying about my friend having this arrangement, DM has jumped on board and wants to go full steam ahead. She’s said that the stamp duty and tax she’d pay would be her gift to us. It’s not a very expensive area we’d be looking in, so I’m not we’d have to pay stamp duty when we buy as FTB? I’m not massively clued up on everything to be perfectly honest as we only looked for a brief period.

@Didyousaysomethingdarling
I’ve just had a google but it doesn’t sound exactly the same. This is more their PIL bought it, when sold they take back their deposit and anything that has been paid off it that is more than the deposit they’ll use towards their first home. I honestly didn’t even know it was a thing? I know her PIL needed a buy-to-let mortgage and everything about the future of the house was discussed with their solicitor, (I asked her a fair few questions as it sounded weird to me!)

Are you only child? If not (and I hate to bring this up, but ....) and something happened to your mum, she'd have to be very careful with her will etc so as if her estate were shared among you and any other kids you could potentially have to sell your home, hope that makes sense I'm in a rush!

Also buy-to-let mortgages often specifically state that the property must not be rented to family members

@iknowimcoming - Ah no I’m an only child!
Oh really? The lenders she was speaking to didn’t seem to have an issue, and obviously my friends PIL have done so, though both were prior to lockdown.
We’ve put everything on the back burner a bit since all this chaos.

Why not a guarantor mortgage? I don't understand your credit issues - are you hiding a problem or is it as stated, in which case just take out a few cc and build up a better credit rating
This way sounds complex and expensive (stamp duty at 3% extra). What happens if she dies for example?

We did this, after 10 years we could afford the remaining balance so bought it off my parents for the market value but with them gifting us the difference between what we could borrow and the value of the house.
So we got were able to get a mortgage for 94,000 on a house worth 188,000. Using my parents 50% equity as our deposit.
My parents did have to pay 6000 ish capital gains but other than that no problems.

@nohardsell - Yes I get that, but her reasoning is that will take a decent amount of time and we’re overcrowded now. The area has gone up rent wise so if we moved somewhere bigger it’d bleed us dry and we wouldn’t have a chance to save much at all. I think she just wants to help when she can see us clambering over one another when we video chat.
If she does die I’d be left her house, so I guess I’d sell that, pay the tax on it and find a house with the money from it? With this house I imagine it’d be sold? I’m not sure about the logistics of all of these things, as it’s not something I’ve thought about in great detail as she’s in fine health.

@Duckfinger - Oh it’s great to hear a success story! How did it work with the money you paid in? Was it gifted to you by them personally and they then took it out of the house sale to put back into their savings?

[quote Sittingawkwardly]@nohardsell - Yes I get that, but her reasoning is that will take a decent amount of time and we’re overcrowded now. The area has gone up rent wise so if we moved somewhere bigger it’d bleed us dry and we wouldn’t have a chance to save much at all. I think she just wants to help when she can see us clambering over one another when we video chat.
If she does die I’d be left her house, so I guess I’d sell that, pay the tax on it and find a house with the money from it? With this house I imagine it’d be sold? I’m not sure about the logistics of all of these things, as it’s not something I’ve thought about in great detail as she’s in fine health.[/quote]
Would a guarantor mortgage take longer to arrange than any other? I was a bit confused there!

@nohardsell - No I don’t think so, but the credit building would to get a decent rate, which is the issue.

Even with a guarantor mortgage? I am surprised. I thought that was the point of them, that they got round the poor credit issue? Is there a hidden story with the poor credit that goes beyond the few months of paying a cc bill to solve it?

Anyway, sorry, it sounds like I am arguing with you
Your solution isn't the one I would go with but I am sure it would be ok as well, as you are the only child and there's enough money from the house sale if your mum did die, so apart from a remarriage I can't think of any other issues not discussed
One advantage is in case of your divorce. I do know people who did it that way to keep assets in the family

@nohardsell - His credit card is only about £200 and he never uses it, I don’t have any credit at all, not even an overdraft. When we spoke to an advisor they recommended about 2 years of good credit proof for it to be a good rate. This was just over a year ago so we’d be here for another year at least before trying again. She had been given a much better rate much sooner, I trust my DM implicitly and don’t really see the issue as long as it doesn’t put her (Or us) in a bad situation. My question was really about what would happen when selling, not if we should do it.

@sittingawkwardly.

No actual money changed hands when we bought it from them, they gifted us all the equity, which was the 20,000 they put down to buy it originally, the more we had paid over the years and the equity from price rises.
They didn't want any money from us as they had also gifted both my brothers 20,000 as deposits and that was the only "real" money they gave us. The rest was luck of the markets.

Haha a little, sorry if I sounded defensive! I do appreciate the concern that I may be doing something a bit silly, but I trust her and the advice she’s been given.

@Duckfinger - Interesting! Thank you for that, it’s definitely the thing I was the most confused about.

I think a guarantor mortgage as mentioned above will do want you want in a simpler and less costly way. No capital gains or additional stamp duty this way. Plus it's your property and falls out of inheritance too. They are aimed specifically at those on low incomes, small deposits and poor or little credit history.

You need to speak with a good mortgage broker.

I'd go for either a guarantor mortgage or look at her gifting you the deposit. The other war is more expensive because it's a second home, and very insecure.

Even if she loaned you the deposit and you paid it back at a very low monthly payment it would give you much more security. A woman coming here saying their mil wanted to do this would be warned against it as it's an extremely precious position. If you split up with your husband he would be left with absolutely nothing.

[quote Sittingawkwardly]@nohardsell - Yes I get that, but her reasoning is that will take a decent amount of time and we’re overcrowded now. The area has gone up rent wise so if we moved somewhere bigger it’d bleed us dry and we wouldn’t have a chance to save much at all. I think she just wants to help when she can see us clambering over one another when we video chat.
If she does die I’d be left her house, so I guess I’d sell that, pay the tax on it and find a house with the money from it? With this house I imagine it’d be sold? I’m not sure about the logistics of all of these things, as it’s not something I’ve thought about in great detail as she’s in fine health.[/quote]
It's far more likely that she might need care support than die leaving you the house (your home) to inherit. If it's owned by her and you're paying the mortgage as if it's rent , no matter what unofficial agreement that you believe you're paying to buy, it'll be counted as her asset and she won't be able to give it to you.

So make sure you sort out an agreement where you are paying toward ownership of the house + interest- like she is the mortgage company- a good solicitor and financial advisor can help you set it up. She can gift money back to you in other ways (like the interest due in small amounts over the years) Otherwise that money you've invested thinking 'is yours' will be included in her financial assessment as her asset. She'd have to sell your house (her second home) to fund her care home or care package- you could be talking at a rate of £3000-5000 a month if she entered a care home.

Cost up a 2 year guarantor mortgage (which you then remortgage as your credit rating has improved) against the second home stamp duty (I think this is an additional 3% of house value)
Alternatively, use the 3? years while she owns it to improve your credit rating then you can claim the additional stamp duty back
I know you're not paying it, but it's a lot of money for your mum to throw away. There might be cheaper solutions