Purchasing a house with parent-in-law's money, temporarily

Question

Say I am about to purchase a £200,000 house (moving house, rather than first-time buyer), and can get a mortgage for the £120,000 difference I need. But, my parents-in-law have offered to loan us the £120,000 at 0% interest instead; and we would pay them back the same amount each month that we would have paid for the mortgage.

The catch, however, is that at some point in the future they are likely to need the money back, although the timescales are not yet known - in which case we would have to take out a mortgage on the house at that point for the remaining value of the loan, in order to pay them back in a lump sum.

What are the legal issues and risks with this approach - how should we make sure everyone is fairly covered? Is there any tax implications? Is there an easier way to approach this? Would we be less likely to get a mortgage in the future because the money would be being used to pay off this loan? Is there anything else I need to know before agreeing to this?

Answer 1

I would proceed with caution and a lot of it depends upon the character of all parties involved. If the opportunity came along to open a joint venture with these people would you do so? Because basically that is what you are doing. Is anyone over emotional and liable to fly off the handle about money despite the facts? Are you able to keep accurate records and record the details of each transaction? This would include backing up bank statements so if the facts were disputed they could be provided as evidence. Are you willing to make payments like clockwork?

If there is one shred of doubt, pass on this generous offer. The money you save will not be worth it. However it could work and does for some people that I know.

If you would want proceed I would draw up a draft agreement. You may want to include a provision that they could not call the loan until 2 years after purchase or some other period of time. You may ask that they give you 90 days notice. What happens if a payment is late? How will the payments be tracked? Every contingency you can think of should be covered as if you do not trust these people or yourself. The goal is that there are no assumptions that everything is discussed beforehand.

Then go see a lawyer and you would pay for that lawyer. They can make the agreement all legal and the cost will certainly be less than a couple of months of interest.

I would say a key component of all of this is when they can call the loan. If they won't agree to a couple of years limitation then it would be a pass for me.

Answer 2

My answer:

The loan you would be looking for is a Home Equity Loan and would be a viable option as long as the lender considers the loan an acceptable risk. That is typically based on your credit worthiness, the value of the home and the amount of the loan. Each lender will have specific guidelines and you can generally get good information from the bigger lender's websites. If your credit is good, that shouldn't be a problem.

Legally, one solution would be to have your in-laws create a trust, make you and your spouse beneficiaries and then give you an interest free loan from the trust. In that case, the loan wouldn't be tied to the house. I think this article has some information that may be helpful.

A word of caution:

This looks great on paper and it may all work out fine, but with such a sizable asset and amount of money, there are many things to consider. Even if everyone gets along great and the future looks bright and cheery, unforeseen situations could arise that change the nature of the agreement or the disposition of one of the parties to the agreement. It's not just about the individuals. There are many external factors that could change things.

It would be best to have a written contract with all of the conditions and expectations so everything is completely clear up front. No chance of any misunderstanding down the road when one person remembers something a little differently than another. There should be extensive thought given to some of the 'what if' types of things as well. No one wants to dwell on it, but nasty things like disability, death and divorce happen in the real world and can greatly complicate handshake agreements.

One thing to be very clear about in the contract is ownership. Do you and your spouse own it and your in-laws have a lien against it like a more typical mortgage? Do your in-laws have partial ownership that gradually transfers to you and your spouse as payments are made? Or is the loan an independent personal loan that is completely unsecured? Will your in-laws have expectations about how the house is maintained and managed or are they content to leave it all to you? If you are unable to pay them back, does ownership revert to your in-laws? Do you have an attorney that can make your preferred ownership arrangement official? Will the legal fees be less than what the loan will cost you?

Even with a very carefully crafted contract, things can go wrong. I am speaking from personal experience with a loan among family members. In our case, there were a number of unexpected turns for the worse over several years. We modified the terms of the agreement multiple times in an attempt to salvage the deal, but in the end, we just scrapped the whole thing and I didn't get much of my money back. I had a written agreement, but the well was dry and it was clear that any effort to recover additional funds would avail nothing but to make a bad situation worse. I am not bitter, love my family members, and have continued to help where I can, but if I had it to do all over again, I would recommend a loan from a traditional lender.

Answer 3

Given the current situation, it seems like a poor bet, honestly. Interest rates are incredibly low - it looks like 3%ish in the UK, if my quick search is accurate - and are basically inflation level or close to it.

While we don't tend to recommend people borrow money to invest given the risks, given this circumstance it seems like it might be a better choice here: take the normal mortgage, ask your parents to just invest that £120,000 in something very safe, and if they're feeling particularly generous they can give you the dividends on that investment - which could be over your interest rate depending on their risk profile, but that's not the point. This avoids the whole "borrowing money from family" tangle, and the "they'll call it in later", which could end up with you taking a mortgage for a higher interest rate - perhaps even higher interest paid for the life of the loan if it's higher by enough - particularly if you have credit issues later on.