Q Just wondering if you can help settle a matter regarding helping our son to buy a house. He is 26 years old, currently renting and looking to buy a house using savings, a lifetime Isa (Lisa) and some help from us.
We have seen a house that is going to be sold at auction. The guide price is £130,000 but we expect it to go for more. It will need extensive work, which we estimate will cost in the region of £30,000 to £40,000. Once renovated, we think it will be worth £250,000.
Our problem is that if this is bought at auction, the price will need to be paid within 20 days. As long as we manage to secure the property for £150,000, we have the cash to pay the auctioneer. Can we put up the cash for our son to buy the house and he buys it in his name? How easy will it be for him to then raise a mortgage on a property that he technically owns outright? Would there be any tax implications for either us or him? Can you see any potential pitfalls? We trust him, so the fact that we are handing over a large part of our savings isn’t an issue, but we will need access to this money at a future date.
YP
A Yes, you can lend your son £150,000 and, as long as you don’t charge him interest, there are no tax implications I can think of but it might be an idea to put in writing that it is a short-term loan. That will make it clear that your financial help is not a gift and so not at risk of having inheritance tax charged if you die within seven years of handing the money over.
And yes, your son can buy it in his own name, provided that his name is on the contracts that are exchanged on the fall of the gavel and which are legally binding, which explains why you only get 20 days to pay the auctioneer.
As to how easy it will be for your son to get a mortgage, it depends. The fact that your son would own the property outright is not a hindrance to getting a mortgage. However, according to Martin Alexander, a senior mortgage adviser at expertmortgageadvisor.co.uk, “most lenders want ownership to be at least six months prior to a remortgage [which is what your son’s mortgage would be]”. So you would have to wait at least six months before you could get your money back. But that assumes that your son’s mortgage application was successful. “Mortgages on properties owned outright are treated the same as any other mortgages,” Alexander says. That means your son will have to pass all the usual mortgage assessments including those relating to income, affordability and any outstanding debts he has. The property itself also has to meet a mortgage lender’s requirements in terms of what it is built from and the state it is in. “If the property is uninhabitable,” Alexander adds, “you will struggle to get a mortgage, because if a property is in a state of disrepair, it is non-mortgageable.”
You ask whether I can see any potential pitfalls. Yes, I can. Although your son will be able to use the money he has saved in his Lisa account towards the purchase, he will face a 25% charge on his savings because he won’t be eligible for the government bonus as he won’t be buying with a mortgage. The same applies if he plans to use his Lisa money to pay for building works, assuming this is where the £30,000 to £40,000 for building work is coming from. If it’s not, it’s not clear to me how the building works are going to be financed.
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