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I’m thinking about lending my son £100,000 to pay his mortgage.
Could I set up a contract that would involve him paying me around £400 a month and avoid having to pay tax in the process?
He would make no profit and his debt would end when I died.
Is this the best way to help you? What do we need to know before committing? SOUTH CAROLINA
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Mortgage help: In our weekly column Navigate the Mortgage Maze, broker David Hollingworth answers your questions
David Hollingworth replies: Your son is lucky to have such good support, which could allow him to pay the mortgage.
Help from a family member may seem like a great option when interest rates are high, and the rapid rise in mortgage rates in recent years will certainly be a factor here.
However, you need to think carefully about lending or gifting money to family and friends to avoid complications in the future. Personal circumstances may change, which could have an impact for one or both of you.
Additionally, you and your child should check the terms and conditions of your current mortgage, as paying it off early can have financial consequences.
> Is a five-year fixed mortgage the best option since interest rates will continue to be higher?
Will they charge you to pay off the mortgage?
Your child may be tied to your current mortgage contract, for example if you have agreed a two- or five-year fixed rate that has not yet finalized.
This means you could incur an early repayment charge (ERC) if you paid off the mortgage with your loan.
The level of ERC that could be paid will vary by lender and product, and may depend on how far into the fixed period you are.
On most mortgages, the ERC will be a percentage of the amount repaid, and this is usually reduced for each year of the fixed period that has passed. However, it could add thousands of dollars to the cost of paying off the mortgage early.
If the current arrangement has come to an end, for example if your child came to the end of a fixed period, did not remortgage and is now on a standard variable rate, you are less likely to have an ERC.
It’s also a good idea to consider what the alternative would be if you didn’t lend him this money. Think about how much time is left to foreclose on the current mortgage, what the monthly payments would be and how they compare to the £400 you would pay each month to repay the loan.
It makes sense to shop around to see what a conventional mortgage can offer. That should be done depending on your child’s circumstances, but to give you an idea, a £100,000 repayment mortgage at a rate of 4.75 per cent over 20 years would cost £646 a month.
What are the terms of your agreement?
There will be many practical issues you will need to consider regarding your generous offer. First of all, it will be essential to be clear if it is a gift or a loan.
It sounds like the latter, but he doesn’t plan to charge interest, so the £400 a month would probably cover the principal repayment only.
As difficult as it may seem, you need to think about what happens if your child doesn’t make the monthly payments.
Additionally, unforeseen scenarios may arise where you need your money back. If you had already invested the money in your house, how would your son pay you back?
And what if your child wanted to sell the property, put a partner on the title, or wanted to take out an additional loan on your home at a later date?
Specialized advice
I do not claim to be a tax advisor and it would be beneficial to receive specialized advice.
If you lend money to someone and charge them interest, you will be subject to income tax, so if you plan to treat the monthly payments as interest rather than repayment of principal, this is something to consider.
You should also seek specialist advice about the possible inheritance tax implications.
It will be important to receive legal advice on how to set up the agreement so that there are adequate protections for both of you.
You will also want to make sure you avoid a scenario that would be subject to regulation and could require authorization from the FCA.
Alternative options
If the main goal is to help your child pay their mortgage, you may also want to explore whether you can help in another way, keeping the funds in your name.
For example, some lenders offer offset mortgages for families, allowing a parent’s savings to be offset against the child’s mortgage.
This reduces the amount of interest charged and the borrower can decide whether to reduce their monthly payment or maintain their normal monthly payment to pay off the mortgage more quickly.
The cash in the clearing account would remain in your name and be accessible, but would not earn any interest.
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