Interest Only Mortgage?
Discussion
My friend asked me to find out about this:
My friends parents own a house on an interest only scheme from an endowment policy from years back that went sour so they are stuck on a high interest rate of 5% repayment on a £265,000 loan, so paying back about £1,100 pm. Her dad is on a war pension and his mum still working. However the house is estimated to be worth £500k - £600k. Her parents are coming to the end of the repayment scheme in a year or so and are too old to remortgage as banks wont help a 70 year old plus they really don't want to let go of the family house, so have asked my mate to help out by buying it. My mates finance is not great but she is thinking to buy the house on a 30 year plan and get a lower interest only rate between 2-3% and pay back the £500 - £600 pm which her parents will effectively pay (will be half of what they are currently paying plus her mum can stop working). Even though she will be on interest only, because the house value is so much higher and unlikely to drop below £265k she thinks its a bit of a deal, as essentially her parents are paying with their pensions and will live in it until they die afterwhich she will sell the house and make a handsome profit.
Is she analysing this right and is there a catch she is missing?
Thanks in advance.
B
My friends parents own a house on an interest only scheme from an endowment policy from years back that went sour so they are stuck on a high interest rate of 5% repayment on a £265,000 loan, so paying back about £1,100 pm. Her dad is on a war pension and his mum still working. However the house is estimated to be worth £500k - £600k. Her parents are coming to the end of the repayment scheme in a year or so and are too old to remortgage as banks wont help a 70 year old plus they really don't want to let go of the family house, so have asked my mate to help out by buying it. My mates finance is not great but she is thinking to buy the house on a 30 year plan and get a lower interest only rate between 2-3% and pay back the £500 - £600 pm which her parents will effectively pay (will be half of what they are currently paying plus her mum can stop working). Even though she will be on interest only, because the house value is so much higher and unlikely to drop below £265k she thinks its a bit of a deal, as essentially her parents are paying with their pensions and will live in it until they die afterwhich she will sell the house and make a handsome profit.
Is she analysing this right and is there a catch she is missing?
Thanks in advance.
B
Edited by boombastictiger on Thursday 26th May 01:21
boombastictiger said:
My friend asked me to find out about this:
My friends parents own a house on an interest only scheme from an endowment policy from years back that went sour so they are stuck on a high interest rate of 5% repayment on a £265,000 loan, so paying back about £1,100 pm. Her dad is on a war pension and his mum still working. However the house is estimated to be worth £500k - £600k. Her parents are coming to the end of the repayment scheme in a year or so and are too old to remortgage as banks wont help a 70 year old plus they really don't want to let go of the family house, so have asked my mate to help out by buying it. My mates finance is not great but she is thinking to buy the house on a 30 year plan and get a lower interest only rate between 2-3% and pay back the £500 - £600 pm which her parents will effectively pay (will be half of what they are currently paying plus her mum can stop working). Even though she will be on interest only, because the house value is so much higher and unlikely to drop below £265k she thinks its a bit of a deal, as essentially her parents are paying with their pensions and will live in it until they die afterwhich she will sell the house and make a handsome profit.
Is she analysing this right and is there a catch she is missing?
Thanks in advance.
B
A lot does not seem to add up. My friends parents own a house on an interest only scheme from an endowment policy from years back that went sour so they are stuck on a high interest rate of 5% repayment on a £265,000 loan, so paying back about £1,100 pm. Her dad is on a war pension and his mum still working. However the house is estimated to be worth £500k - £600k. Her parents are coming to the end of the repayment scheme in a year or so and are too old to remortgage as banks wont help a 70 year old plus they really don't want to let go of the family house, so have asked my mate to help out by buying it. My mates finance is not great but she is thinking to buy the house on a 30 year plan and get a lower interest only rate between 2-3% and pay back the £500 - £600 pm which her parents will effectively pay (will be half of what they are currently paying plus her mum can stop working). Even though she will be on interest only, because the house value is so much higher and unlikely to drop below £265k she thinks its a bit of a deal, as essentially her parents are paying with their pensions and will live in it until they die afterwhich she will sell the house and make a handsome profit.
Is she analysing this right and is there a catch she is missing?
Thanks in advance.
B
a) If her finance is not good how is she going to raise the +500k.
b) If she goes interest only she will need to show a repayment vehicle. What will this be?
c) If her parents are effectively paying her rent for the house, this will be taxable
When it comes to buying her first house (assuming she doesn't have one) she won't be able to access any government help for first time buyers as she will no longer be classified as such. Likewise when she then sells that house for the next step up she'll be liable for the extra 3% stamp duty (or more since it will probably go up in the next few years), which can seriously add to her moving costs.
What if her parents need long-term care, how will they fund it? The difference between a council-paid care home and privately paid one are significant, will she really want to see them in a place they're unhappy with simply because they cannot sell their home to pay for better care?
What will she do if the relationship sours? A lot of family relationships struggle as parents get older because the elderly get very set in their ways and hate change, she may find she's stuck paying off a house for parents that are refusing to talk to her because of XYZ thing that she did or didn't do 5 years ago.
Also as a landlord she'll be responsible for a whole host of things with the house, does she have the money to maintain it properly and do everything the law requires?
What if her parents need long-term care, how will they fund it? The difference between a council-paid care home and privately paid one are significant, will she really want to see them in a place they're unhappy with simply because they cannot sell their home to pay for better care?
What will she do if the relationship sours? A lot of family relationships struggle as parents get older because the elderly get very set in their ways and hate change, she may find she's stuck paying off a house for parents that are refusing to talk to her because of XYZ thing that she did or didn't do 5 years ago.
Also as a landlord she'll be responsible for a whole host of things with the house, does she have the money to maintain it properly and do everything the law requires?
She can't get a BTL as family members will be living in it = No no.
She won't be able to get a second Residential mortgage for a family member, if she doesn't have her own property she lives in already, Plus her income would need to stretch to cover both mortgages.
Probably about a dozen other reasons I could list why this isn't viable.............
She won't be able to get a second Residential mortgage for a family member, if she doesn't have her own property she lives in already, Plus her income would need to stretch to cover both mortgages.
Probably about a dozen other reasons I could list why this isn't viable.............
GT03ROB said:
A lot does not seem to add up.
a) If her finance is not good how is she going to raise the +500k.
b) If she goes interest only she will need to show a repayment vehicle. What will this be?
c) If her parents are effectively paying her rent for the house, this will be taxable
I forgot to mention she lives in the house currently and does not have her own place. This would be her first time buy and parents are willing sell at cost price £265k as the house would be hers to inherit anyway. When I say her finance is not good as in she has no savings and with her current job would not be able to afford £1,200 on actual mortgage repayments.a) If her finance is not good how is she going to raise the +500k.
b) If she goes interest only she will need to show a repayment vehicle. What will this be?
c) If her parents are effectively paying her rent for the house, this will be taxable
As she lives with parents and is in the house her parents paying or giving her money to help fund the house is would be happening i am sure she will pay something but not sure how much.
MentalSarcasm said:
When it comes to buying her first house (assuming she doesn't have one) she won't be able to access any government help for first time buyers as she will no longer be classified as such. Likewise when she then sells that house for the next step up she'll be liable for the extra 3% stamp duty (or more since it will probably go up in the next few years), which can seriously add to her moving costs.
What if her parents need long-term care, how will they fund it? The difference between a council-paid care home and privately paid one are significant, will she really want to see them in a place they're unhappy with simply because they cannot sell their home to pay for better care?
What will she do if the relationship sours? A lot of family relationships struggle as parents get older because the elderly get very set in their ways and hate change, she may find she's stuck paying off a house for parents that are refusing to talk to her because of XYZ thing that she did or didn't do 5 years ago.
Also as a landlord she'll be responsible for a whole host of things with the house, does she have the money to maintain it properly and do everything the law requires?
I don't think shes has thought that far ahead, i think her mindset is that she will look after her parents until the end and stay in the house as its a great bargain at £265k considering its worth 500-600k but she can't do the repayments hence why Interest only is appealing. What if her parents need long-term care, how will they fund it? The difference between a council-paid care home and privately paid one are significant, will she really want to see them in a place they're unhappy with simply because they cannot sell their home to pay for better care?
What will she do if the relationship sours? A lot of family relationships struggle as parents get older because the elderly get very set in their ways and hate change, she may find she's stuck paying off a house for parents that are refusing to talk to her because of XYZ thing that she did or didn't do 5 years ago.
Also as a landlord she'll be responsible for a whole host of things with the house, does she have the money to maintain it properly and do everything the law requires?
Looking after the house a long with her parents should be fine as affectiveley nothing would change in thebway they live, its just remorgaging into her name.
boombastictiger said:
I forgot to mention she lives in the house currently and does not have her own place. This would be her first time buy and parents are willing sell at cost price £265k as the house would be hers to inherit anyway. When I say her finance is not good as in she has no savings and with her current job would not be able to afford £1,200 on actual mortgage repayments.
As she lives with parents and is in the house her parents paying or giving her money to help fund the house is would be happening i am sure she will pay something but not sure how much.
That changes things.......although her parents can't just "Sell it at cost price".......it would need to be bought at near to full market value (with stamp duty payable).......the parents can gift the equity in the property to them as their deposit but they would still need to be able to afford a £265k mortgage in the normal way Eg they'd need earnings of at least £55k and interest only may be possible but criteria is pretty strict on this...........As she lives with parents and is in the house her parents paying or giving her money to help fund the house is would be happening i am sure she will pay something but not sure how much.
Sarnie said:
No it's not......you can't remortgage a property you don't own.......this is a purchase in the normal way, just that the vendors are the parents, the buyer is the daughter and they all live together!
Ahh yes i understand. I am advising them to sell the house take the profit and downgrade the house or move further out debt free, but they are really attached to the house. Sarnie said:
That changes things.......although her parents can't just "Sell it at cost price".......it would need to be bought at near to full market value (with stamp duty payable).......the parents can gift the equity in the property to them as their deposit but they would still need to be able to afford a £265k mortgage in the normal way Eg they'd need earnings of at least £55k and interest only may be possible but criteria is pretty strict on this...........
Why would it have to be at near full market value? If you own the house can't you sell it for whatever you want? It seems like the interest only option is not an option for her and I think the responses have made it clear so I am going to try and talk her out of it. But what solution/options, if any, could there be for them to keep the house based on these circumstances, as I don't want to be the bearer of bad news without shining a little light at the end of the tunnel:
Daughter = Can comfortably pay up to £500 pm
Parents = Can pay up to £1,200 pm (however are old in their 60's so unlikely to get another mortgage)
Mortgage Amount Required: £265,000
Thanks in advance
Daughter = Can comfortably pay up to £500 pm
Parents = Can pay up to £1,200 pm (however are old in their 60's so unlikely to get another mortgage)
Mortgage Amount Required: £265,000
Thanks in advance
boombastictiger said:
Am confused a bit on this. Say you own a house and need a desperate sale, you cannot offload it for any price you want (as long as original mortgage is paid off?). I had no idea about this.
You can sell for whatever you want, however you may be liable for stamp duty at a fair market value (and if not a straight residential property then CGT too). Otherwise people would pay £1 for the house and £499k for carpets & curtains.Interest Only is available, I recently re-mortgaged with IO.
The hoops to go through to get a mortgage these days are ridiculous but if your freind's salary can cover the £265k she may be able to manage it if the LTV is 50% or better - seems it may be if the house is valued at £530K+
She doesn't need a repayment vehicle, she can declare it will covered by selling the house if/when required.
Her main issue will be proving to the lender that she can cover the £265K on her earnings. Their criteria around this is WAY more strictly checked than it was pre-2008.
As an indicator for her, I was able to re-mortgage IO at 1.59% for 2 years, so her monthly payments on £265K could be somewhere around £350 a month I guess.
The hoops to go through to get a mortgage these days are ridiculous but if your freind's salary can cover the £265k she may be able to manage it if the LTV is 50% or better - seems it may be if the house is valued at £530K+
She doesn't need a repayment vehicle, she can declare it will covered by selling the house if/when required.
Her main issue will be proving to the lender that she can cover the £265K on her earnings. Their criteria around this is WAY more strictly checked than it was pre-2008.
As an indicator for her, I was able to re-mortgage IO at 1.59% for 2 years, so her monthly payments on £265K could be somewhere around £350 a month I guess.
I don't know what mortgage products are available, but if between them they can genuinely comfortably pay 1700 pcm, then borrowing 265k is easily affordable. That's equivalent of paying 7.7% while providing collateral worth several times the loan. There's something wrong with the residential loan market if there isn't a product available for them. (There may well be something wrong with the market, though. And I'd defer 100% to Sarnie when it comes to discussing what products are actually out there. )
boombastictiger said:
It seems like the interest only option is not an option for her and I think the responses have made it clear so I am going to try and talk her out of it. But what solution/options, if any, could there be for them to keep the house based on these circumstances, as I don't want to be the bearer of bad news without shining a little light at the end of the tunnel:
Daughter = Can comfortably pay up to £500 pm
Parents = Can pay up to £1,200 pm (however are old in their 60's so unlikely to get another mortgage)
Mortgage Amount Required: £265,000
Thanks in advance
What is her annual salary?Daughter = Can comfortably pay up to £500 pm
Parents = Can pay up to £1,200 pm (however are old in their 60's so unlikely to get another mortgage)
Mortgage Amount Required: £265,000
Thanks in advance
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