How can I assist my daughter along with her mortgage after a break up?

I helped my daughter buy her current home, but unfortunately her husband has decided he wants out of the marriage.

She wants to stay in the property to lessen the impact on the children and would be able to afford the mortgage by herself.

She is currently undergoing a transfer process to remove her husband from the title deeds and mortgage. 

She will pay £130,000 to buy out her husband and be left with £164,000 outstanding on the mortgage, on a 1.29 per cent fixed rate with two years remaining. 

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I want to help her out, and am trying to figure out how much more to gift her towards the mortgage, taking into account the early repayment charges. 

As most of my money is tied up in my my cash Isa and stocks and shares Isa, I am trying to work out the best arrangement. 

I was thinking of gifting around another £75,000 to get her mortgage down to £90,000, then looking to make overpayments from then on. I know it’s complicated and even more so if I have not understood any tax implications.

  

David Hollingworth replies: I’m sorry to hear of the breakup of your daughter’s marriage, but it sounds like there are some positive options open to her and she clearly has your support as she and her ex-husband reach a settlement.

It’s not possible for me to put any figures on what the property may be worth, or if the settlement amounts are correct. 

That could be something for your daughter to seek advice about from her solicitor, if she hasn’t already, to see if there may be a way to achieve an independent valuation figure that everyone will be comfortable with.

Low mortgage rate is an advantage 

The good news is that your daughter can afford to take on the existing mortgage and buy out her ex-husband. 

Having to take on the existing mortgage and raise an additional amount of capital to buy out a partner is often where things can prove difficult for those wanting to remain in the family home.

But it looks like she can meet the required amount without increasing the borrowing, in conjunction with any other support from you. 

The mortgage lender will want to see that the mortgage will remain affordable in a single name. Taking on an existing mortgage with one income not two can often prove difficult.

As well as the lender agreeing the mortgage can shift into one name, the other good news is on the interest rate. 

A mortgage rate of 1.29 per cent is unachievable now as we’ve shifted into a higher rate environment. 

Having such a low rate will help make the mortgage more affordable for the remaining couple of years and gives some time to plan for the end of the deal.

> What next for mortgage rates and should you fix for two or five years? 

Is the money better kept in savings? 

You are clearly keen to help your daughter reduce her mortgage more over time. 

As the mortgage rate is so low and your savings rates are so much higher, I do think you could consider whether now is the right time to reduce the mortgage so significantly.

Savings rates are so much higher than the current mortgage rate that cash could earn more on deposit than the cost of the mortgage, even if there is tax to pay on the interest. 

You could therefore consider whether a strategy of putting money into higher return savings could ultimately help to reduce the mortgage more significantly when the current deal comes to an end.

As you have identified there will no doubt be early repayment charges during the remainder of the fixed rate period. 

Most lenders will allow for a proportion of the mortgage to be repaid without any ERCs. This will typically be 10 per cent of the mortgage balance but some lenders can offer even more flexibility with up to 20 per cent overpayments allowed without incurring a penalty.

If you are focused on reducing the debt more quickly despite the low rate, then using the available ERC-free allowance will make sense.

Check with the lender what that amount will equate to, as some will base it on the outstanding balance each year, whereas others will use the original balance.

The charge itself is likely to be a percentage of the amount repaid, and will often step down each year until the fixed rate ends. 

Unless it’s vital to reduce the mortgage balance immediately, those charges are likely to be better avoided.

If you or your daughter can save into an account with a higher interest rate a bigger balance could be built up, allowing for the mortgage to be reduced more significantly at the end of the deal. 

We have to assume that the rates will still be higher at that point, but at least you will have made the most of the current low to put your daughter in a better position.

As you are gifting some significant sums to your daughter then you may want to take some specialist advice to consider any implications from an inheritance tax perspective.