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I helped my daughter buy her current house, but unfortunately her husband decided he wants to break up the marriage.
She wants to stay in the property to reduce the impact on the children and could pay the mortgage herself.
She is currently in a transfer process to get her husband out of the property titles and mortgage.
She will pay £130,000 to buy out her husband and will have £164,000 outstanding on the mortgage, at a fixed rate of 1.29 per cent with two years remaining.
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I want to help her and am trying to figure out how much more to give her toward the mortgage, taking into account prepayment fees.
As most of my money is tied up in my cash Isa and stocks and shares Isa, I’m trying to find the best deal.
He was thinking of donating around an extra £75,000 to reduce his mortgage to £90,000 and then looking to make overpayments from then on. I know it is complicated and even more so if I have not understood the tax implications.
David Hollingworth replies: I’m sorry to hear about the breakdown of your daughter’s marriage, but it sounds like there are some positive options open to her and she clearly has your support as she and her ex-husband come to terms.
It is not possible for me to give figures on the value of the property or whether the settlement amounts are correct.
This might be something your daughter could ask her attorney for advice on, if she hasn’t already, to see if there is a way to come up with an independent valuation figure that everyone is comfortable with.
Low mortgage rate is a plus
The good news is that your daughter can afford to take over the existing mortgage and buy out her ex-husband.
Having to take on the existing mortgage and raise additional capital to buy out a partner is often what can be difficult for those who want to remain in the family home.
But it seems that you can reach the required amount without increasing the loan, along with any other support from your side.
The mortgage lender will want to ensure that the mortgage remains affordable under one name. It can often be difficult to take on an existing mortgage with one income rather than two.
In addition to the lender accepting that the mortgage can change to a name, the other good news is in the interest rate.
A mortgage rate of 1.29 percent is unattainable now that we have moved into a higher rate environment.
Having such a low rate will help make the mortgage more affordable for the remaining two years and give you some time to plan for the end of the deal.
> What’s next for mortgage rates? Should they be fixed for two or five years?
Save or overpay? David Hollingworth warns that it would be worth building up higher interest rate savings while the mortgage rate is at 1.29%.
Is it better to keep money in savings?
You are clearly interested in helping your daughter reduce her mortgage even further over time.
Since your mortgage rate is so low and your savings rates are so much higher, I think you might consider whether now is the right time to reduce your mortgage so significantly.
Savings rates are so much higher than the current mortgage rate that cash could earn more on deposit than the cost of the mortgage, even if you have to pay taxes on the interest.
Therefore, you might consider whether a strategy of investing money in higher-yielding savings could ultimately help reduce your mortgage more significantly when your current deal ends.
As you have identified, there will undoubtedly be early repayment charges for the remainder of the fixed rate period.
Most lenders will allow a portion of the mortgage to be repaid without any ERC. Typically this will be 10 percent of the mortgage balance, but some lenders may offer even more flexibility, allowing overpayments of up to 20 percent without incurring a penalty.
If you are focused on reducing debt faster despite the low rate, then it will make sense to use the free ERC allocation available.
Check with your lender what that amount will equal, as some will base it on each year’s outstanding balance, while others will use the original balance.
The fee itself is likely to be a percentage of the amount refunded and will often reduce each year until the fixed rate ends.
Unless it’s vital to reduce your mortgage balance immediately, it’s probably best to avoid those fees.
If you or your daughter can save in an account with a higher interest rate, a larger balance could accumulate, allowing you to reduce your mortgage more significantly at the end of the deal.
We have to assume that rates will still be higher at that time, but at least you will have taken advantage of the current minimum to put your daughter in a better position.
As you are donating significant sums to your daughter, you may wish to consult a specialist to consider the implications from an inheritance tax perspective.
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