Should I take out second mortgage on my mother and father £2m house to purchase out my sibling? DAVID HOLLINGWORTH REPLIES

My parents are looking at remortgaging their home to pay off a sibling who has a stake in the house. 

The house is worth between £1.8 and £2million and was inherited. The sibling does not live in the home, but is entitled to around £600,000 of its value. 

There has been an agreement between them over the years for my parents to pay the sibling rent on his portion of the property until later this year, where the sibling is to receive the full value for their stake in the property.

The problem is that my parents’ income (they are both in their early sixties) is not high enough to avoid a suitably sized mortgage on the remaining portion of the property – even though the rent payment is higher than the proposed mortgage payment.

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My parents have received advice for a mortgage broker that equity release does not appear to be an option in this case. 

As such they have asked me and my wife to go into the mortgage with them (our income is higher than theirs) but they would be paying it in full. 

My instincts tell me this is a bad idea for myself as we currently have a mortgage on our own home.

Our mortgage value is £200,000 on a house valued at £300,000 and we would likely be looking to move to a larger home in the next five years. Is my parents’ plan as stupid as my instincts say it is? J.B.

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David Hollingworth replies: The clear preference here is for your parents to be able to take a mortgage that will allow them to assume full ownership and buy out the sibling, who is presumably a part-owner. 

You need to take legal advice on how to approach the buying out and transfer the equity into your parents’ names, if that is possible.

It will also be important to consider the costs that may come with the purchase, not only legal costs but also any potential stamp duty liability.

That will help you to better understand the total cost of the transaction and therefore the borrowing that will be necessary. 

Can the parents get a mortgage?  

Affordability seems to be the main sticking point for your parents, but there may also be factors at play because of their age. 

There’s no getting round the need for your parents to be able to demonstrate that they will be able to afford the mortgage now and in the future.

Lenders will consider income and outgoings and although affordability calculations are now more individual, that is likely to result in a typical figure of around 4.5 times income. It’s possible for it to be higher or lower, depending on the circumstances.

Age can play a part, as lenders will often have a maximum age limit at the end of the mortgage term. 

That can often require the mortgage to be repaid by the age of 75 and so would limit the maximum mortgage term. 

The shorter the available term, the higher the monthly mortgage payments will be and that could also limit how much can be borrowed.

There is varying flexibility from lenders though, and a growing number can consider older borrowers, with more now applying a maximum of 80 or 85 and some imposing no hard limit at all.

That could help enable a longer term, but if that takes the mortgage into retirement the lender will require evidence of expected post-retirement income to satisfy affordability throughout, not just based on current income.

Retirement interest only mortgages still require affordability to be proven but have no maximum term. 

Only interest is paid each month, so the balance is repaid when the property is sold, on death or a move into long term care.

> How to remortgage your home: Your guide to finding the best deal 

Hollingworth warns that going into a mortgage with their parents could potentially limit their options when they come to move home

Is a joint mortgage a good idea?

Just as many parents are enlisted to help mortgage affordability for their children, it can also be true for older borrowers trying to meet affordability. 

However, you would also need to show a lender that you can cover your existing mortgage along with the new mortgage.

You are right to ask the question and to think carefully about future implications if you were to take your parents’ mortgage on. 

It will have an impact on what you might be able to borrow further down the line, as any lender will need to look at your total commitments when deciding what they can offer.

Depending on income and outgoings that could potentially limit your options when you come to move home. 

You would also be liable for the entire mortgage payment if something resulted in your parents being unable to afford them. 

Release from the mortgage would require the lender’s consent, so would presumably only happen when the mortgage is paid off, either through monthly repayments or on sale.

You would also need to consider the ownership structure. Being named on a mortgage would typically mean being an owner of the property. 

That would open you up to the 5 per cent stamp duty surcharge as you own an additional property. 

However, a growing number of lenders will allow you to be party to the mortgage without being named on the title of the property, which could avoid any potential surcharge or capital gains tax liability.

As much as I’m sure you will want to help your parents to remain in the property you will all need to carefully consider the impact of the arrangement and independent legal advice could be a cost worth paying before any of you proceed. 

Some of the lenders that may be able to help may insist on it for all these reasons. 

For example, Gen H is particularly focused on this kind of scenario and makes a point of highlighting the pros and cons for someone boosting income in this way.