Lending Money to Family to Buy a House
Can a family member lend me money to buy a house?
Yes, you can loan a family member money to buy a house.
It is very important to get the terms of the loan set out legally as if you get it wrong, the loan could give the Lender an unintended beneficial interest (that's a type of ownership) over the property.
The most important thing to consider when lending money to family to buy a house, is whether you want to make a straightforward loan (with or without interest charge), or an investment in the property. In this article we'll compare both options.
Lending money to family to buy a house | Investing money in a family member's purchase | ||
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Can a loan from family affect my Mortgage?
When your mortgage lender makes an offer, they will look at your other debts and obligations to determine your 'borrowing capacity' this is what they think you can realistically afford to repay.
If they see that you owe a family member a substantial amount in the form of a personal loan, they will likely reduce what they are willing to lend you themselves, to account for the additional burden on your finances due to the other loan from family.
The mortgage lender wants to know if the family member could have a claim over the title which may effect their ability to get their mortgage loan back. If this were a gift instead, the mortgage lender would not need to worry about your ability to pay both loans back, just the amount they are offering you.
How does lending money to family to buy a house effect Tax liability?
If you secure the money as an investment instead of a loan, the lender becomes a beneficial owner of their share of the property. This can mean that the purchaser becomes liable for second home stamp duty (if the lender already owns property themselves).
Capital gains tax liability is payable on any property which is not your main residence, this means that if the family member lending money does not live in the property, then capital gains tax will be payable on its sale.
Parachute law does not provide tax advice. This must be provided by a professional accountant. Contact us for referral, for tax advice we trust.
Loan agreement or gifted deposit?
If you decide to go for a loan, it's very important to make sure you set out in writing whether this is a loan to be repaid, or a gift towards the house. Often clients put money towards a family members property and are disappointed to find that they are unable to recover the funds, years down the line.
In order to protect both parties and to ensure that the lender gets their money back, you will need a loan agreement. This can serve to protect the borrower as well, setting out an agreed deadline or trigger for the loan to be repaid upon.
Most often the loan is secured against the property itself, as a second charge. This protects the lender against the borrower becoming bankrupt.
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If, instead, you are receiving the funds from family as a gift, there are specific guidelines to follow regarding gifted deposits. Your mortgage lender will be able to explain their requirements.
How do I protect my investment in a family member's property?
If you decide to invest in the property, in exchange for a share of the beneficial interest, you should execute a deed of trust to protect both party's interests and avoid falling out in the future.
A deed of trust sets out the percentage of the beneficial interest that each party owns. It also sets out your intentions for what will happen to any rental income from the property and the proceeds from it's sale.
Investing in the property this way gives the lender a certain level of obligation over maintaining the property, as their share of the beneficial interest will gain or lose value with the value of the property. For this reason we advise a floating deed of trust, which can allow for any further investments made by either party to adjust their shares.
For example: The roof needs replacing. If the borrower does not complete this work, the value of the house will see a considerable loss. In order to protect their investment, the lender must pay for the work themselves, but they do not want to do this for 'nothing'.
A floating deed of trust contains a formula, which can increase their percentage share to accommodate the additional investment.
Bear in mind that while this option will not effect the borrower's borrowing capacity in the same way, you will lose any first time buyer relief. You are also likely to have to pay second home stamp duty land tax if the lender owns another property, this is payable at an additional 3% on purchases worth £40,000 or more.
Some deeds of trust effect the mortgage lender. Your solicitor will be able to advise whether the deed must be declared to the lender.
Are you lending money to family to buy a house?
The process for settling a property dispute can be long and costly. We can provide independent legal advice or legally binding documents to make sure you know what you're agreeing to and what you're liable for. If you don't have a legal agreement setting out your beneficial share in the property then get in contact with us and see how we can help.
We can assist with:
- Working out your beneficial interest
- Pre-action negotiations
- Application to court
- Pre-liminary hearing
- Mediation
- Court appearance
We have on hand counsel to support your claim and offer guidance along the way.
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Frequently Asked Questions
Yes, you can buy your son or child a house. The easiest option is to make the purchase in your own name and then transfer the property for no consideration. (That means for free).
Please note that the child may be required to pay Inheritance Tax on the market value if the parent dies within 7 years of the transfer.
Cash gifts amounting to more than £3,000 per year must be declared by the gifter. Tax advice must be provided by a licensed accountant.
It is not advised to lend more than you can afford. However, when lending a large amount of money, you should be aware that the interest you charge on the loan could be subject to income tax.
You can make a loan to a family member interest free. Remember that you would be earning interest on the funds if you kept them in savings instead. Ask yourself if you may end up resenting this loss of earnings in the future. Charging interest may be the best way to prevent any ill-feeling between yourselves later on.
Yes, loaning money to parents to buy a house works just as described in the article above.
This article is intended as a guide and is not a substitute for proper financial advice.
Parachute Law Ltd does not provide stamp duty, bankruptcy, financial, tax (including capital gains tax, inheritance tax or rental income tax) advice and does not advise you as to the suitability of these documents for your particular circumstances.
We can introduce you to a professional accountant if you would like tax and financial advice specific to your situation and assets.
Find Out More:
- How do I declare no interest in my family member's property?
- What happens if I'm on the mortgage but it's not my house?
- What is beneficial interest?
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