Should I mortgage my son £100,000 to repay his mortgage?

I am considering loaning my son £100,000 to pay off his mortgage. 

Could I set up a contract that would involve him paying me back around £400 a month, and avoid having to pay tax in the process? 

I would be making no profit and his debt will finish when I die.

Is this the best way to help him, and what do we need to know before committing? S.C.

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David Hollingworth replies: Your son is fortunate to have such good support, which could potentially allow him to pay off the mortgage. 

Help from a family member can sound like a great option when interest rates are high, and the rapid rise in mortgage rates over the last couple of years will no doubt be a factor here.

Lending or gifting money to family and friends needs to be thought about carefully, though, to avoid complications further down the line. Personal circumstances can change which could have an impact for either or both of you.

In addition, you and your son will need to look at the terms and conditions of his current mortgage, as repaying it early may have financial consequences.  

> Is a five-year fixed mortgage the best option as interest rates set to stay higher? 

Will he be charged to pay off the mortgage? 

Your son may be tied into his current mortgage deal, for example if he has agreed a two or five-year fixed rate that has not yet come to an end. 

This means he could incur an early repayment charge (ERC) if he paid off the mortgage with your loan. 

The level of ERC that could be payable will vary by lender and product, and can depend on how far through the fixed period he is. 

On most mortgages the ERC will be a percentage of the amount repaid, and this often reduces for each year of the fixed period that has elapsed. Nevertheless, it could add thousands to the cost of paying off the mortgage early.

If the current deal has come to an end, for example if your son came to the end of a fixed period, didn’t remortgage and is now on a standard variable rate, it’s less likely to carry an ERC. 

It is also a good idea to consider what the alternative would be if you weren’t lending him this money. Think about how long is left to run on the current mortgage, what the monthly payments would be, and how that compares to the £400 he would pay you each month to repay the loan. 

It makes sense to shop around to see what a conventional mortgage may be able to offer as a comparison. That should be done according to your son’s circumstances but to give an idea a £100,000 repayment mortgage at a rate of 4.75 per cent over 20 years would cost £646 per month.

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What are the terms of your agreement?  

There will be plenty of practical issues for you to consider regarding your generous offer. First and foremost, it will be crucial to be clear about whether this will be a gift or a loan. 

It sounds like it is the latter, but you don’t plan to charge interest, so the £400 per month would presumably cover repayment of the capital only.

As difficult as it may seem, you should think about what happens if your son fails to meet the monthly payments. 

In addition, there may be unforeseen scenarios where you need the money back. If he had already poured the cash into his home, how would your son repay you?

And what would happen if your son wished to sell the property, put a partner on the title deeds, or wanted to take on additional borrowing against his home at a later date?

Specialist advice

I don’t claim to be a tax adviser and specialist advice would be beneficial. 

If you loan someone money and charge interest then it would be liable to income tax, so if you were planning to treat the monthly payments as interest rather than capital repayment this is something to consider. 

You should also take specialist advice on the potential inheritance tax implications.

Taking legal advice on setting up the agreement to have the appropriate protections in place for you both will be important. 

You’ll also want to ensure that you avoid a scenario that would fall under regulation and could require FCA authorisation.

Alternative options

If the main aim is to help your son afford his mortgage, you may also want to explore whether you can help in a different way, whilst keeping the funds in your name. 

For example, some lenders offer family offset mortgages, allowing parental savings to be offset against the child’s mortgage.

This reduces the amount of interest charged and the borrower can decide whether to reduce their monthly payment or to maintain their normal monthly payment to pay the mortgage off more quickly. 

The cash in the offset account would remain in your name and be accessible, but would not earn any interest.