The Bank of Mum and Dad

[funduffer]

I have 2 children, both of whom are married and have mortgages.

Our daughter is in a well paid job and has no financial worries.

Our son is a teacher, currently on a 6 month supply contract and his wife, also a teacher, has just lost her job due to ill health. They have a young son and their financial position is increasingly precarious. Their fixed term mortgage contract expires in September 2023, when they will presumably face a x3 or so increase in interest rate.

I would like to help them out, but rather than just throw money at them, and to be fair to my daughter, I want to lend them money on a more formal basis (more like a real bank!). I have read a bit about family loans and private mortgages, but I am not really sure what is appropriate. In essence I would like to:

1. Lend them money to pay off their mortgage in September 2023.
2. Have a loan/mortgage agreement where I can flexibly set the interest rate and payback terms. (I would charge an affordable interest rate, and payback period according to their circumstances)
3. If I die, I would want to ensure any outstanding loan is deducted from my son's share of his inheritance, so as not to disadvantage my daughter.
4. I would ideally like some way of protecting my loan if my son were to split up with his wife (they jointly own their home) - just in case!

I realise I will almost certainly need to involve a solicitor in this, if for no other reason than my will will need changing.

Anyone tried this sort of thing before? Any traps to avoid? Loan or mortgage?

FD

[Lootman]

I have thought about something like this but then decided against it. The question that stumped me is this: What would I do if my son could not make the payments and effectively defaulted on my loan to him?

I would presumably take a charge against his property as security for the "mortgage". That would enable me to start repossession of the property if there is a default. But would I ever actually do that and potentially render the occupants homeless? Doubtful.

Without that it would merely be an unsecured loan. And that, if not repaid, might look a lot like an outright gift but without the IHT benefits.

[Dod101]

I have thought about something like this but then decided against it. The question that stumped me is this: What would I do if my son could not make the payments and effectively defaulted on my loan to him?

I would presumably take a charge against his property as security for the "mortgage". That would enable me to start repossession of the property if there is a default. But would I ever actually do that and potentially render the occupants homeless? Doubtful.

Without that it would merely be an unsecured loan. And that, if not repaid, might look a lot like an outright gift but without the IHT benefits.

I had a similar situation (worse!) with my son and his wife. I had initially given him a loan but after a few months he stopped repayments and how could I realistically enforce the loan? I ended up writing it off and giving my daughter the same amount as the loan. This happened more than once and in the end I just said, 'That is it'. They survived.

I would not set up any formal deal if I were you. Find some other way and, if you can afford it and it will help as a one off, give them some cash.

Dod

[AsleepInYorkshire]

I have 2 children, both of whom are married and have mortgages.

Our daughter is in a well paid job and has no financial worries.

Our son is a teacher, currently on a 6 month supply contract and his wife, also a teacher, has just lost her job due to ill health. They have a young son and their financial position is increasingly precarious. Their fixed term mortgage contract expires in September 2023, when they will presumably face a x3 or so increase in interest rate.

I would like to help them out, but rather than just throw money at them, and to be fair to my daughter, I want to lend them money on a more formal basis (more like a real bank!). I have read a bit about family loans and private mortgages, but I am not really sure what is appropriate. In essence I would like to:

1. Lend them money to pay off their mortgage in September 2023.
2. Have a loan/mortgage agreement where I can flexibly set the interest rate and payback terms. (I would charge an affordable interest rate, and payback period according to their circumstances)
3. If I die, I would want to ensure any outstanding loan is deducted from my son's share of his inheritance, so as not to disadvantage my daughter.
4. I would ideally like some way of protecting my loan if my son were to split up with his wife (they jointly own their home) - just in case!

I realise I will almost certainly need to involve a solicitor in this, if for no other reason than my will will need changing.

Anyone tried this sort of thing before? Any traps to avoid? Loan or mortgage?

FD

I'm sorry to hear about your sons problems. I hope his wife's health issues improve and she is able to return to work. Before I go further, may I caveat please. I have had issues with my health over decades. My income has been extremely intermittent. Indeed I haven't worked for the last year. We're financially safe and with some luck I will be able to return to work in the New Year and replenish our savings.

Been there, seen it, done, got the t-shirt and know it will continue.

So ... what I have to say is not through ignorance. I've known "misfortune" for far too long. What would I do in your situation?

I'd put away my spreadsheet. I'd listen to my heart. I'd do what I could financially to support my son, without regard to protecting my pennies. I'd act solely out of love for my child. I'd be completely transparent with my daughter, but would not balance what I give my son with the same to her. She's sensible. She knows she doesn't need financial support. Why would she expect her Dad to give her his money just so it was fair? That's not what love is about, is it?

I've been in your daughters shoes, more than once. When she was alive my Mum spoke to me about sending money to my sister in Australia. I thanked Mum for her transparency but made it clear it was none of my business what she did with her money. I certainly did not expect Mum to give me money to "make it fair".

Mum did make it fair in her will, which was her choice, of course.

Yes, it's the right thing to do, if you want to, and can afford it. And it's also reasonable to tell your daughter. But, and purely my opinion only, I suggest you consider love first and last.

Take care

AiY(D)

[funduffer]

I have thought about something like this but then decided against it. The question that stumped me is this: What would I do if my son could not make the payments and effectively defaulted on my loan to him?

I would presumably take a charge against his property as security for the "mortgage". That would enable me to start repossession of the property if there is a default. But would I ever actually do that and potentially render the occupants homeless? Doubtful.

Without that it would merely be an unsecured loan. And that, if not repaid, might look a lot like an outright gift but without the IHT benefits.

Lootman, thanks for the interesting comment.

Mmm yes, IHT is a consideration I need to think about.

I am 67, and I would expect any loan arrangement to last perhaps 20 years+, so there is a significant chance the loan wouldn't be re-paid by my death. I am not sure how it would be treated for IHT purposes (which is a distinct possibility in my case). If I live 7 years after the loan is made, the amount of loan outstanding on my death might be treated as a gift, and then not subject to IHT? Not sure. I would need advice on this.

My expectation is the loan wouldn't be repaid on my death, so that is why I would want any amount outstanding to be included in his share of the inheritance.

I don't want to end up owning his house if I can avoid it!

FD

[CliffEdge]

I have been thinking about this recently myself .
If I made the loan I would secure it by a first charge on the property.
This would ensure that
1 the money would be spent paying off the mortgage in full, nothing else
2 no further loans could be secured on the house
3 if the house is sold, for any reason , the outstanding balance would be repaid to me or my wife (if appropriate a new loan could be offered)

I would make the loan interest free, to be repaid by 800 monthly repayments (I am 69, my wife 70). I would produce an annual statement of the outstanding balance. If no repayments had been made in the year, the balance would be the same at the end of the year as at the beginning. I would not be interested in enforcing the repayments or repossessing the house. When both I and my wife had died the loan would be written off. I would not consider iht implications to influence my decision.

[SebsCat]

If you don't need the capital repaid nor the income then I would consider just gifting the cash. Makes things so much simpler and could reduce IHT if that's an issue.

I understand the wish to not have cash end up with your son's wife if they should divorce, but is that something you really want to get involved in should it come to that? Might an alternative solution be for your son & his wife to agree a non-equal split of the house's equity? (IANAL and I've no idea if a contested divorce could overrule such an agreement).

If it is necessary, you can alter your will to not disadvantage your daughter. eg if you give X to your son then the will could say that X (adjusted for inflation) is left to your daughter and the remainder is split equally between them.

[DrFfybes]

One things that pops to my mind about a formal loan agreement...

2. Have a loan/mortgage agreement where I can flexibly set the interest rate and payback terms. (I would charge an affordable interest rate, and payback period according to their circumstances)

...is whether that makes you a lender, with the consequent regulations thereof.

And as others have said, what happens if he defaults, or sells the house?

Your simplest move would just be a gift, either using the IHT exempt limits, or over them. If iHT is an issue, it is something you should be loking at now anyway. If you want to formalise it, amend the will so that your daughter gets the same amount as you give your son now, plus her share of what is left.

My parents always split everything 50:50 AFAIK, I never bothered to check that much, but also gave to their grandchildren (both my sister's children), and mum also gave £30/month to each of her 4 great grandchildren for the last decade or so of her life. Everyone got £250 each Xmas, except me and my sister who got £1500 each from her. I've never really added it up before, or bothered about it but it probably adds up to £15k or more going down that side.
Then again I went to a fee paying school, no idea if my sister or her children got the equivalent, and dad did clear the last of my mortgage in the late 90s.
And over the last 10 years or so my sister often went on hols with my mum at her expense, I only managed it the once!

The point is we always trusted them to be fair, never pushed the issue or discussed it with each other, even though my teacher sister and her teacher husband with 2 children were far more financially secure than I was working in scientific academia.

If you have the cash, gift it, either to them or by cheque to their mortgage company (although that shows some lack of trust). If they're going to get it anyway, you may as well see them enjoy it.

Paul

[scrumpyjack]

I lent my children money to buy property but did so interest free. No point in them paying me interest which I would then pay tax on! I took out a charge on the properties. After a couple of years, when it was clear they were financially sensible, I forgave the debts so the IHT 7 year period started then. A secured loan can be a good protection in case of matrimonial difficulties, and also stops them running up other debt on the security of the property. There are a lot of issues to think about when contemplating such an arrangement!

[Howard]

Given similar circumstances to the OP, we made the decision to just give large cash sums towards housing and family costs to our poorer child. I didn't want to be in a position of affluence and not help. We took the risk of partner going off. We chose not to have some sort of legal arrangement and kept things simple. I insisted that a small mortgage was kept to instil some financial discipline.

To compensate the wealthy offspring, I gave a smaller but significant cash sum. They asked for my help to invest it and, somewhat irritatingly, thanks to us choosing significant winners like Microsoft and Amazon grew the amount faster than my portfolio!

Many years later we are delighted that we took this course of action. In effect we paid for a nice house for one family and a significant investment portfolio for the other. All IHT free. The rewards from the family "investments" have been better than any dividends.

Not for everyone, but I agree with the posters above who advise just giving the money free of ties.

Good luck with the decision.

Howard

[scotview]

I have 2 children, both of whom are married and have mortgages.

FD

Maybe an alternative approach for you to consider.

There are approaching 6 million (six million) people depending on secure government payments to maintain their livelihoods. Before you consider handing over your many tens of thousands of hard earned pounds, maybe you and your son should look into the following scenario.
He cannot get a new teaching contract, so he applies for universal credit.
He then will be eligible to work part time and still get income supplement.
If his wife is incapacitated, they claim for mobility support and get a new family sized car.
The family will not have to pay medical prescriptions, get free optician bills and other medical reliefs.
You son will get job seekers allowance, income support, OAP payment subsidy, council tax subsidy, heating allowances, energy support grants.
He will also qualify to have his mortgage interest payments paid in full, regardless of the interest rate.

I strongly advise you look into this before handing over your cash, on which, no doubt, you have paid a fair share of tax on.

Sounds like they are genuine cases for support.

By the way, I have not been a believer in government support until Covid and that has opened Pandora's box.

[Loup321]

I agree with AiY - equal does not always mean fair. Have a conversation with your daughter, along the same lines as you posted here, and see what her views are.

Also, nothing needs to be done urgently. From your OP, it seems that there is some time until the mortgage payments will increase. Much could change in that time. Your son and his wife could be in a better financial situation (both in full time jobs, for example). But if they are not, then could you gift them the amount it would take to reduce their mortgage to the level where the monthly payments would remain the same as they are now? Then you're helping them out with what is necessary, but not waving a magic wand and disabling them from learning how to stand on their own two feet.

And I agree about looking into benefits. Personally, I'd rather be a net giver than a net taker, but I did take student grants and live with a partner who was on job seekers allowance and other associated benefits for a year. When I needed it, I took it (plus one state funded education for my daughter, and healthcare such as maternity and a couple of operations for other things). Right now, I have probably paid in far more than I have taken out, but who knows what the future will hold?

[Bminusrob]

This may be completely irrelevant, but I will say it anyway, just in case.

If you have savings, is it possible to help by using your savings to offset the mortgage. Offset mortgages are products in their own right, so you wolud need to set this up after the fixed mortgage finishes. If you have the resources, it may be worth looking into, in advance of the fixed term mortgage finishing.

[stevensfo]

I agree with AiY - equal does not always mean fair. Have a conversation with your daughter, along the same lines as you posted here, and see what her views are.

Also, nothing needs to be done urgently. From your OP, it seems that there is some time until the mortgage payments will increase. Much could change in that time. Your son and his wife could be in a better financial situation (both in full time jobs, for example). But if they are not, then could you gift them the amount it would take to reduce their mortgage to the level where the monthly payments would remain the same as they are now? Then you're helping them out with what is necessary, but not waving a magic wand and disabling them from learning how to stand on their own two feet.

And I agree about looking into benefits. Personally, I'd rather be a net giver than a net taker, but I did take student grants and live with a partner who was on job seekers allowance and other associated benefits for a year. When I needed it, I took it (plus one state funded education for my daughter, and healthcare such as maternity and a couple of operations for other things). Right now, I have probably paid in far more than I have taken out, but who knows what the future will hold?

Apart from my student grant, I was only on benefits once. I graduated in 1984 which was the year when job offers in New Scientist and Nature dwindled to one or two pages. Getting a low paid job in my home town would have been easy, but I was desperate for a break and wanted to organise an inter-railing trip with a friend. So the woman in the Job Centre told me to sign on.

I thought that my Dad, a Daily Mail reading, self-made businessman would be shocked, but he just laughed and said that he was pleased that some of the &%#$!! tax he'd paid was being returned.

Steve

PS I returned from the continent with about 5p in my pocket, worked in a factory for a year before finally getting a post in a research lab.
PPS The factory job paid better than the lab!

[TwmSionCati]

Let him have the money as an advance against his inheritance, but require yearly repayments of RPI+5% (or whatever) to compensate the estate (your estate, your family’s estate, his family’s estate) for its lost dividends. When the children inherit he brings the advance and all the repayments, each uprated per RPI, “into hotchpot”, so your daughter isn’t disadvantaged.

TSC

Daykin 'A note on ... hotchpot', J Inst Actuaries 93(1967); Miles & Denyer Wills, Probate and Administration (1993), sect 3.6 ‘Hotchpot’; Weigl ‘Hotchpot clauses – a primer’ LSUC Ests & Trusts Forum (2001); Theobold on Wills (17th edn, 2010), p. 854; Underhill & Hayton Law of Trusts and Trustees (2010), §44.54; ‘... Family Provision Claims on Death’ Law Commission, Consultation Paper No 191 (2011); Stephens ‘Hotchpot Clauses’ Law Soc Ontario (2018); http://www.collegewillwriting.co.uk/wp-content/uploads/2021/06/s32-Powers-updated.docx

[Lootman]

Let him have the money as an advance against his inheritance, but require yearly repayments of RPI+5% (or whatever) to compensate the estate (your estate, your family’s estate, his family’s estate) for its lost dividends.

Such an arrangement would discount the value of the transfer for IHT purposes.

Better to make the transfer an outright gift, unless IHT is not an issue.

[JohnB]

RPI+5%!!!! thats much higher than the bank mortgage you are trying to avoid

[TwmSionCati]

Such an arrangement would discount the value of the transfer for IHT purposes. Better to make the transfer an outright gift, unless IHT is not an issue.

A good point, for consideration by anyone for whom it is an issue. (Not me, alas!)

TSC

[TwmSionCati]

RPI+5%!!!! thats much higher than the bank mortgage you are trying to avoid

Well, yes and no.

One of my boys needed K£10 to buy a car a few months ago. He could get

— a loan from his bank, repaying its costs over the next 5 years (£33pm) and returning its capital over the same 5 years (£167pm); or

— an advance from the estate: repaying its costs until he inherits (£40pm) and returning its capital only then and then only notionally (K£10 uprated per RPI paid out of his inheritance).

Only if — very improbably — he doesn’t inherit for at least 25 years will he have paid out more than the K£12 he’ld’ve paid the bank. And it won’t matter even if so, because the cash he pays out goes to the estate — his’n’our estate — and is included in the hotchpot.

For that reason, too, it doesn’t much matter what figure is agreed, nor whether it tracks inflation: we went for a flat, non-tracking, 4.8%pa (£40pm on K£10) because that’s the 20-year-average-yield of the source-portfolio, which we wanted roughly to retain its value.

All the same, RPI+5% isn’t particularly high, to judge by some of the HYP-results reported on these boards.

TSC

[scotia]

All the same, RPI+5% isn’t particularly high, to judge by some of the HYP-results reported on these boards.

TSC

Currently (October RPI Figure Released in November) is 14.2%. So RPI + 5% is 19.2%. Are there any lucky investors currently averaging a 19.2% yield on their investments? If so, don't be shy - and let us into your secret