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We own a house with around £150,000 left to pay the mortgage; It has been valued at £450,000.
We have our eye on a larger house which is selling for £650,000. When we called the realtor, we told him we were buying with cash (just for convenience) and he responded that we could get a 10 percent discount if we didn’t have a chain and had the cash.
My parents could come up with £600,000 for us to buy the house at a discount and quickly.
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Mortgage help: In our weekly column Navigate the Mortgage Maze, broker David Hollingworth answers your questions
Our idea is then to give them the £300,000 or so made from our old house when we sell it and then give them back the remaining £300,000 in the form of a sort of interest-free mortgage from the Bank of Mum and Dad.
They are happy to be repaid over 20 years i.e. £1250 per month and we are all happy to have a document drawn up to commit to these terms.
It all sounds ideal on paper, circumnavigating the bank, but are we missing something?
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David Hollingworth replies: It’s good news that your initial suggestion of being a cash buyer can come true with the help of your parents.
There are a couple of potential benefits for you to use the generous offer of a parenting loan, the most obvious being that there is no interest charge proposed.
Additionally, it could potentially allow you to reduce the purchase price of the property.
At first glance, the agent suggests he could reduce the purchase price by more than £60,000.
This presumably gives you no guarantee and the first thing you should do is make sure you are comfortable with what you think the property is worth to you.
Ultimately, it will be up to the seller to decide whether they are willing to accept an offer 10 percent below the asking price to achieve a quicker listing.
Don’t forget that the agent works for the supplier, so they will be looking to secure the highest price and not help you reduce a lower price.
That said, everyone might be interested in a quicker sale and the seller’s personal circumstances may mean that a quick sale would be preferable.
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Cash Buyer: The real estate agent said our reader could get a 10% discount if he didn’t have a chain and had the cash.
Check your budget when purchasing the house.
When looking at the numbers, it’s important to factor in the additional costs of not only buying but also selling your current home.
A big cost for homebuyers is stamp duty and you will face a larger upfront bill assuming you buy before the sale of your existing property takes place.
A 3 per cent surcharge is applied to an additional property, adding an extra £18,000 for a total of £35,500 on a purchase price of £600,000.
If you subsequently sell your existing home within 36 months, you can be refunded the surcharge.
Don’t skimp on the survey and make sure you go in with your eyes open.
Mortgage lenders carry out basic appraisals to ensure that the property should have adequate security, but never to protect the buyer.
Therefore, it makes sense to conduct a more in-depth study on whether or not a traditional mortgage exists.
Parental loan: legal advice recommended
You, your partner and your parents should seek legal advice about the possible implications of using a parental loan.
There are many different ways you can decide to structure the paperwork, but it will benefit everyone to think about what might happen in certain situations.
The decisions you make now could affect what you can do in the future, and of course your parents will want to be sure that their money is safe.
They may want to register an interest in the property which could have an impact on their ability to mortgage the property or secure funds later against the collateral.
No conventional mortgage lender would accept anything more than having the first charge on the property.
You need to think about what would happen in worst-case scenarios to ensure you have covered all eventualities.
For example, you would need to consider what would happen if there was a breakdown in your relationship with your partner and the property needed to be sold, what would happen if you missed monthly payments or if one of the parties died.
Generally, all of these elements are well understood in a traditional mortgage, but it is best for all parties to be aware of the legal structure and potential implications, not only for current plans but also for the future, to provide clarity and protection for everyone.
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It’s time for a day of management: When looking at the numbers, it’s important to take into account the additional costs of not only buying but also selling your current home.
Alternative family mortgage support options
There are alternative options where parents may be happy to help fund a mortgage, rather than provide it.
Yorkshire BS and Family BS can offer offset arrangements that allow parents to deposit cash into a separate savings account which is then used to reduce the interest charged on the child’s mortgage.
That allows the benefit of cash to be felt by reducing the interest bill, but the savings can remain in the parent’s name.
Generation H has some very flexible products that allow the parent company or cash provider to take a fractional share of ownership if they wish.
They may not be necessary in your case, but they are good examples of how lenders can offer flexible solutions to meet combined family support.
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