UK Mortgaging parents house to buy stocks


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Now that I have your attention...

I know the title sounds really stupid haha, but I don't think what I'm thinking of doing is actually that stupid!

BACKGROUND:

My mother right now can take our a 10 year interest only loan on her house (Worth circa £500,000) for a fixed introductory rate of 2.5% PA for 10 years (Then variable, currently circa 3.5%). This can be up to 75% LTV, so technically we could take our £400,000.

This would be used to buy investment trusts specializing in dividend stocks (with dividend cover for bad periods). After all investment costs, these should provide a pretty stable return of 5% per year in dividends each year. This cashflow would be used primarily to finance the loan. A 10 year period is quite a substantial amount - so even if there is another 2008 - any fall in stock price shouldn't be disastrous over the 10 year period.

Any shortfall in cashflow would be covered by my salary. My disposable income can cover the interest payments.


MY ACCOUNTING QUESTIONS:
1) Maybe this is the wrong forum - but could I take out the mortgage against my mothers property with her permission - or would she have to take out the mortgage and grant me the money to invest?

2A) If I can take out the mortgage myself and buy the stocks - can I offset the dividends received and any capital gains against the loan interest payments and loan repayment?

2Bi) If my mother were to take out the mortgage on my behalf - would she be able to transfer the funds to me to invest, or would the investments have to be made in her name to avoid gift taxes?
AND
2Bii) If anything were to happen to my mother and she were to pass away with the mortgage outstanding, would I be able to inherit the mortgage, or would it trigger a nasty situation?

Any general advice would also be appreciated!

Many thanks,

John
 
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kirby

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Mom takes the risk and you want the rewards.
See anything wrong with this?
 

kirby

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Above is info from FINRA, an investor protection organization in the US.
 

bklynboy

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Not sure I agree with your approach on mortgaging to buy equities and get a stable 5% return. After paying off the loan at best you make 2.5% a year or 10K - before fees and taxes so its likely half of this number. Seems like a risky way to generate income. However if you really want to do this then your mom needs to be on the mortgage and you could co sign to make sure its approved. She gets the cash and can put in an investment account with you as power of attorney to make investment decisions. If she passes, then it goes through estate and mortgage must be paid off (its not assignable and may require you liquidate the invested assets or home to get the cash to pay off). This can mean if values are down you end up taking a loss. Talk to a financial advisor and an estate attorney for the specifics.
 
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Fidget

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1) Sounds like your mother owns the house already and this is an offer made to her, in which case it's a remortgage because it's equity release. You need to ask the lender directly to see if they'd allow you to take it out on her behalf. Even if that lender refuses, others might do it albeit not on the same offer. So you might need to shop around.

The overall issue I see is your means of financing the mortgage interest. I doubt many, if any, lenders will like the idea of being reliant on the returns from your investments. So you may have to show that you can afford it regardless of your investment ideas.

2a) It's an interest only loan, so only the mortgage interest is payable during the period. The capital element of the loan becomes payable in full at the end of the mortgage term, so you'd need to be sure to reinvest enough of your returns in a long term plan - same duration as the mortgage so that on maturity, there's enough to cover the capital element of the loan. Otherwise you'd need to either find the money somehow or sell the house to repay it.

You wouldn't be able to offset dividends received/capital gains directly against the mortgage interest - they're completely different things. The lender will just want the interest and eventual capital element repaid as they fall due. As the interest element will be on a monthly basis, this might be an issue if you're reliant on dividends/Capital Gains to fund the payment as they don't happen on a monthly basis. Remember that both dividends and capital gains are taxable, so you need to factor that into your projected returns cashflow.

2b) Your mother could give the money to you with no immediate tax implications, although it would be classed as a potentially exempt transfer for inheritance tax purposes and become taxable if she died within seven years. There's a current £325k IHT threshold before any IHT would be due and some other reliefs available, so you'd need to do your sums to see the impact of her dying between years 1 to 7 of giving you the money.

2bii) If she died whilst the mortgage was outstanding then the outstanding amount would be due to the lender from her death estate, which could force the sale of the house. Even if she made a will and left it to you, a basic condition of any mortgage is that title cannot pass to somebody else if there's an outstanding amount on the mortgage. That's not so say the lender wouldn't allow you to take the mortgage on, but that would a matter for you and the lender. Or it's possible that whatever plan you reinvest in to cover the capital element will pay out the amount owing on death if before maturity. That would sort out the outstanding mortgage issue, but then the house would be in the death estate at its market value at the time of death.

2b would apply too if death was within seven years of giving you the money, which could also force the sale of the house since there'd be the capital element of the loan to be repaid immediately plus 40% IHT on the money given to you (after subtracting reliefs available).

So, as you can see, it's all quite involved, and there's probably some things I haven't thought of here. So you'd be best to sit down with a financial adviser before doing anything.
 
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