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
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.
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
Sarnie said:
What is her annual salary?
Saw her this weekend and got more info, her salary I am not 100% sure as she has a funny bonus structure however the last 12 months she said she earned £37,000, but says her base is £28k. She says that from her base salary alone, after all bills, direct debits and neccesary costs come out she has around £1,000 to play with which to this date has gone on shopping sprees, holidays, luxurys etc. From this she is happy to let £500 go into the house and maybe more if it really made a difference. Nickyboy said:
I pay just over £550 a month on a £100k mortgage at something like 1.4%, no way on earth is she going to be able to firstly get a £265k mortgage earning £37k (my salary is just below that) and secondly only realistically being able to afford £500 or so a month means she'll be looking at a mortgage of not much more than £120k
I think the idea is to see what options are available if incomes were combined, would a mortgage be feasable then or high risk due to age of parents.DonkeyApple said:
To be honest, this doesn't add up either. That implies it costs her £1,500 a month to live at her parents house, which is obviously totally insane.
Separately, she doesn't have the income to take the mortgage. It sounds like she has no savings to add to the deposit and it also sounds like she is haemorrhaging cash in a monthly basis. But then it does read like she has had to excellent teachers in the art of not saving, not planning and living beyond ones' means.
If all three of them want to continue living in the same property until they die off one by one then is there an option for all three of them to combine their incomes to remortgage at a sensible rate and start paying down their debt? Plus have insurance policies on the individuals to cover Any loss of their income when they die?
Obviously she is a professional spinster and she and her parents have decided that she won't ever be having any relationships or children and that her life is to be dedicated to keeping her parents in a lifestyle they cannot personally afford and to wiping their backsides when they stop being able to do it for themselves?
It would just be so much more sensible for the parents to actually act like parents and not the children and sell up to clear their debt and then give a chunk of the equity profit to their daughter to let her buy her own home?
But this is a very interesting thread as although I'm very surprised to see 70 year olds having the problem of not bothering to pay down their mortgage debt during their working life, I suspect that it is going to be an all too common issue among my generation who have been the true consumers of interest free mortgages with no savings plan and the money that should have been saved used for living the dream.
Tbh i think they are all beginning to accept that they will have to let the house go. The parents enjoyed 25 years of living there developed and raised a family around the house so there is a lot of sentimental value and history, but thats a risk they took. My friend has lived a good lifestyle shes not lazy either shes been working since 15 and shes now nearly 30, but i think at the same time she does not want the house and would prefer to rent to avoid the debt rather than a mortgage. Her personal life(family goals) i think she is still deciding on shes not sure if she wants kids etc. Separately, she doesn't have the income to take the mortgage. It sounds like she has no savings to add to the deposit and it also sounds like she is haemorrhaging cash in a monthly basis. But then it does read like she has had to excellent teachers in the art of not saving, not planning and living beyond ones' means.
If all three of them want to continue living in the same property until they die off one by one then is there an option for all three of them to combine their incomes to remortgage at a sensible rate and start paying down their debt? Plus have insurance policies on the individuals to cover Any loss of their income when they die?
Obviously she is a professional spinster and she and her parents have decided that she won't ever be having any relationships or children and that her life is to be dedicated to keeping her parents in a lifestyle they cannot personally afford and to wiping their backsides when they stop being able to do it for themselves?
It would just be so much more sensible for the parents to actually act like parents and not the children and sell up to clear their debt and then give a chunk of the equity profit to their daughter to let her buy her own home?
But this is a very interesting thread as although I'm very surprised to see 70 year olds having the problem of not bothering to pay down their mortgage debt during their working life, I suspect that it is going to be an all too common issue among my generation who have been the true consumers of interest free mortgages with no savings plan and the money that should have been saved used for living the dream.
Bottom line is that her parents house is worth 500k-600k maybe more as it has been developed (loft, annex) so there will be a fair chunk of profit when sold and I have said to them all that they could live relatively luxury lives if they downgraded or moved further out paid for a house outright or took on a much smaller mortgage. They would owe no debt and all money would be for themselves. They could own a nice house, and with their salaries travel every other month, business class...Not many have that option.
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