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First of all, it might help you to know I reside in the UK. It might make a difference.

We (my gf and myself) are buying our first house and my parents are willing to help us out.

What has been proposed is that they will pay our deposit (probably 25%) and we will get a mortgage for the rest.

In return they will take ownership of 25% of the property. In this sense they aren't giving away their money, they're investing their capital in a property. We will then raise capital and "buy back" the 25% (or on selling the house will return their investment).

My questions are thus:

  1. Is this possible in practice? Can my parent's legally "own" 25% of a property and myself and my girlfriend own the other 75%? What implications does this have at the time of selling and such? My parents are very good natured, however I want to know where we stand legally.
  2. Will this change the nature of my mortgage? If my parents put down 25% of the property value in cash, but then take ownership of 25% of the property does that still count as a "deposit" in the eyes of a mortgage company? Are there any differences?
  3. How easy (legally and in practice) will it be to "buy back" the 25% off my parents later on?
  4. Is there anything else I need to know going down this path?

Thank you.

  • When you "buy back" the 25%, will it include an increase based on the increased value of the house, a fixed interest rate, or none? – Nicole Sep 15 '11 at 14:05
  • It'll probably be at the amount of money they put into it in the first place. Similarly if we sell the house at a later date for a loss or a profit they will only want back what they put into it. – Thomas Clayson Sep 15 '11 at 14:14
  • Be careful about this: "loss or a profit they will only want back what they put into it". Sounds nice now, but when the time actually comes one of you will not be happy. I'd work out an annual % rate and apply it. – gef05 Sep 15 '11 at 14:23
  • The problem is that my parents want to retire soon and so they are happy to put money into the house but want it paid back. Its almost like a loan - the 25% ownership is merely security. If they didn't get a 25% ownership of the house then they would be loaning me the money security free and I would have to pay it back in its entirety. – Thomas Clayson Sep 15 '11 at 14:38
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The biggest issue I can see is that in order to have your parents protected properly, they'll have to register an interest in the property (ie, the 25%). I can't see the mortgage lender being too happy to have a second lienholder on the house for a total of 100% of the purchase price.

Usually their conditions state that they'll need to be informed of other debts secured on the house and might actually have a say in that.

Another way of accomplishing this is putting your parents on the house's deeds but that might also complicate matters with the lender and cause additional problems when it comes to selling the property. Not to mention that if anything bad happens to your parents, their stake in your property would be counted as one of their assets and you might find yourself in the situation where you have to come up with 25% of the property value right now or you might find that you have to sell the property to the first bidder simply because you do need the money as quickly as possible.

Personally I wouldn't do it (especially without legal advice), the legal structure can be a nightmare and you'll just end up painted into a corner.

  • Hmm, are there any other ways to provide my family with more security (and myself with less pressure!). I don't really just want to take potentially quite a lot of money indefinitely and with no security on my parent's part. – Thomas Clayson Sep 15 '11 at 15:44
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Timo's concern may be accurate, but talking to the bank is the next step.

If I am the banker, I'm happier that (a) there's 25% down, and (b) it's not an additional loan as some might get from a parent.

It's not that your parents have a lien for the 25% as a lender would, the structure is ownership, they own 25%. An important, if not obvious, distinction.

Timo is right that as an asset of the parents, the ownership stake is at risk if their finances run into issues. Other than that, so long as all is done above board, your proposal can work. The bank will want your parents to sign the note of course, you can't mortgage property you don't fully own.

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The problem is, you are trying to qualify for a loan that has a 25% down payment using money you don't have, which defeats the purpose of having a down payment.

The best thing to do is have your parents buy the house for you. You then rent the house from them where your rent is equal to the mortgage + x. Your parents then put x into savings account for you and then once you have 25% in that account, they gift it to you and you purchase the house from them using that 25% as the downpayment for the mortgage.

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