[Closed] Anyone ever had a mortgage sized loan from a relative?

I leant my brother £70k when he split up with his ex-partner 7 years ago, so he could buy her out of the property. Although were brothers and best mates we drew up a contract with the help from my solicitor in case anything went pear shaped with in the loan period. Got the loan back this summer with a hefty amount of interest.

It strikes me there is an opportunity to be had here where she loans the money back to us and we pay her an interest rate vastly better than she could get from a bank etc and a tidy monthly top up and we pay a rate less that a bank will lend us.

Have you factored in any income tax she will pay?

convert - I've not done it, but I'm distantly aware of it happening within my family (far enough away not to financially affect me) and in a rather different context in my wife's family. In my wife's family's case some pretty ropey legal advice came very close to the lender being shafted by care costs and a lot of stress in the process. If I've read it correctly you have a sibling? In that case, I'd suggest their view is quite important (as if they even remotely think you're exploiting the situation it will get messy - either now or in the future). I think if it were my mother she would only consider it if all the children could get the same sized "loan".

However, if I was looking at this a different way round I might say, why would she sell if she doesn't need the money? Would she not be better retaining ownership and the income from the holiday house - and perhaps paying you to do the changeovers etc?

I'm just about to borrow a fair amount extra on my mortgage for 1.2 percent...how much interest were you planning on paying her yet still undercutting the bank?

@winston holiday let mortgages have higher interest charges than residential ones.

I’m planning to lend a significant amount of money to my sister so she can buy a house, so keen to hear thoughts.

My way of thinking is that if she’s paying 1.7% for a mortgage, she may as well pay me that instead as I can’t get 1.7% from a savings account. Obviously needs a legal contract in place, will be secured against the house and I will have to declare the interest for tax purposes.

Am I missing something in this?
You make no reference to paying off the mortgage you will take out - unless you are thinking of early redemption in which case you need to factor in the associated fees.
Who are 'we' - you and partner or you and sibling?
Suggest you go through some worked examples based on various assumptions - size of mortgage, LTV %, term, interest rate, estimated total interest repayable, projected net annual income from holiday lets, proposed interest rate payable to your mother, proposed 'tidy monthly top-up' to your mother - to get a better idea of possible viability.
If, after that, you still think it's worthwhile I suggest you talk with a solicitor (ideally with some relevant experience) and a tax accountant.

Suggest you go through some worked examples based on various assumptions – size of mortgage, LTV %, term, interest rate, estimated total interest repayable, projected net annual income from holiday lets, proposed interest rate payable to your mother, proposed ‘tidy monthly top-up’ to your mother – to get a better idea of possible viability.

Yes - that all works. If going commercially for the mortgage we should be able to pay off the loan in 10 years of rentals minus expenses.

I’m just about to borrow a fair amount extra on my mortgage for 1.2 percent…how much interest were you planning on paying her yet still undercutting the bank?

As said, that's not remotely the kind of rates available to buy to holiday let customers and you can't use a conventional mortgage in these circumstances.

Have you factored in any income tax she will pay?

Good point - that would need factoring in.

However, if I was looking at this a different way round I might say, why would she sell if she doesn’t need the money? Would she not be better retaining ownership and the income from the holiday house – and perhaps paying you to do the changeovers etc?

I know, it might well make sense. But she seems to be tired of the responsibility. I'm on site (literally next door) so it's not really much of a responsibility. I'd like to own it long term but possibly after dies would suit me so it's still needs finalising.

Get it legally sorted just in case - God forbid - you have to convince HMRC it's not an elaborate inheritance tax dodge.

If you factor in fees and additional interest rate for Holiday let mortgage plus all the paperwork and faffing about they will required a private loan is a great idea.

You could probably pay her 5 - 7% and still be better off then getting a mortgage.

I have experience doing this.

PM me for more info if you like.

you have to convince HMRC it’s not an elaborate inheritance tax dodge.

That was my thought - it could well look like that couldn't it. Her total assets are well below the £650K 2nd death limit.....but Rishi is casting his eye about and that might well change.....but care home fees too.

Mr C - I will. Cheers.

My MIL loaned us the money to buy our current house - she got a better rate on her savings and we still got a better rate on the mortgage that way.

Her solicitor set up a “private mortgage” agreement and we manage it on a spreadsheet. She pays tax on the interest, but she was self-assessing anyway so it wasn’t exactly extra work for her.

In recent years we might have been able to get a lower rate, but the cost of arranging it would have been more than we’d have saved in interest.

The only time we had a problem was when her new bank account had a limit on the amount we could pay in...

If I was the one lending the money, I’d have a think about what might happen if savings interest rates were heading up, but that depends on how good a relationship you have / want with the borrower!

Regularly loan large amounts from the father in law. Always fully above board, legal contracts in place, HMRC always aware, and we share the same accountant which is helpful as the father in law trusts him. We always make other family members aware. We always go through the details with the other siblings to ensure they are comfortable with the arrangements and are fully aware of what it means to them or any of their future inheritance.....we try to avoid any loans or finance deals that could have an impact on anyone else.
The loan is normally paid back within 12 to 18 months.
We own a number of businesses, he has access to a lot of capital. I’m currently building a block of apartments, we used his cash to buy the land and between me and the bank we are paying for the build. I’ll remortgage once the build is complete and he gets paid his money back.....then we do it again on the next project. I currently owe him a lot more than a house mortgage. At first it’s difficult to ask for assistance, but he enjoys being involved in the projects we do, he gets to “oversee” it from a distance. He makes no profit on the loans, occasionally when it has been for a large amount we have been time constrained with the repayments due to it being a loan from one of his bigger companies. This can be a stress as we have to avoid him being charged interest by HMRC.
Back to the OP, would an option be for her to gift you the house? You then agree to split the future value of the house (after cgt)with your sibling? Then just top up your mums pension with the letting income? Take an income yourself for running the business.

As said, that’s not remotely the kind of rates available to buy to holiday let customers and you can’t use a conventional mortgage in these circumstances.

How mortgaged are you on your own home?
We added a wedge to our home mortgage to buy the BTHL as the rates were cheaper and the process easier.

Back to the OP, would an option be for her to gift you the house? You then agree to split the future value of the house (after cgt)with your sibling? Then just top up your mums pension with the letting income? Take an income yourself for running the business.

This.

We did a version of this, and in return built my Mum a self-contained annex.

My Grandma said it best:
"there are no pockets in a shroud and I want to spend my money on what I want while I'm alive"

there are no pockets in a shroud

I'm always hearing about clothes without pockets... seems to be a fashion thing...

😉

How mortgaged are you on your own home?
We added a wedge to our home mortgage to buy the BTHL as the rates were cheaper and the process easier.

Own it outright.

It's still an option I guess - but mortgage interest repayments against the holiday let can be offset against the profits of the lettings for tax but the mortgage on our own house can't. But as you say the interest rates are smaller so arguably the difference is marginal.

It’s still an option I guess – but mortgage interest repayments against the holiday let can be offset against the profits of the lettings for tax but the mortgage on our own house can’t.

Disagree. I took advice on this and was told that as long as you have full traceability that the money was taken out and used for the BTHL you can still offset the interest payments

(YFAMV)

I would go for it with contracts in place to protect everyone.

Be aware the sale has to be market priced as it will be a disposal from her estate, and the loan and interest ditto or it can be seen as a stealthy way to move money about.

Good luck with the venture, be careful where it is some local authorities will be taxing holiday let's.

Be aware the sale has to be market priced as it will be a disposal from her estate, and the loan and interest ditto or it can be seen as a stealthy way to move money about.

She'll also be liable for a capital gains bill on completion of the sale (IIRC it was a holiday let, so she didn't live there).

She’ll also be liable for a capital gains bill on completion of the sale (IIRC it was a holiday let, so she didn’t live there).

This is a very important point. If she croaks and you get it in the will then no CGT or IHT (assuming sub £325/£650k + primary residence) will be paid.

If she gives it to you or sells it to you then CGT is liable.

We ( or at least my mum's financial advisor) ****ed this up two years ago and cost her about £15 grand.

Actually that's a really good point as cgt on an investment property dies with the person, replaced by iht if applicable. So selling a holiday let in this case triggers cgt.

I d look at some of the cgt reform ideas too, like taxing cgt at income tax levels. Somethings going to change as the govt need 400 bn GBP and second home owners are an easy target.

Or if nothing to pay just get the deal done prior to any changes.