Borrow from relative to facilitate trading up?

hi - this may well better belong in money makeover so please feel free to move as appropriate.

Salaries:
Me = 120k (Private sector). I get bonuses too but don't like to include them in financial calcs as they are not guaranteed.
Spouse = 65k (Public sector)

Value of house = 450k approx. (Dublin)
Mortgage balance = 90k approx, 10 years remaining. SVR = 3.7%
Monthly payment = €930
Original borrowing was 345k in 2004 and we paid a lot off early.

No other debt. We have about 50k in deposits. I have about 350k in my pension fund and contribute the max (objective being to retire in late 50s with a million fund).

Three kids of schoolgoing age.
We are both in our early 40s.

Per the above details, you can see we are in fairly robust financial health which obviously is good. I have a specific question though and I have no idea whether it's something that can or should be done!

We want to move house and buy a bigger place.
Looking at the market, this will likely cost 6-700k.

In order to give us greater flexibility and freedom to move quickly, I would like to pay off our existing mortgage and replace it with a loan from a relative. This relative has approx 500k on deposit, earning very low rates of return. They have a very low tolerance for risk and will not countenance any form of holding except cash.

My proposal is that I borrow 90k from my relative at a rate of 2%. This is far better than what we pay on our mortage and also far better than they receive on their deposits. Win\win for both parties. We would repay the loan over 4 years on an amortising basis, 22.5k in capital plus interest p.a. which we can easily afford out of our cash flow.
It also means that we become mortgage-free on our current place, thus allowing us to avoid the need to sell it prior to buying a new house. In my mind, this is a significant advantage.
We would take out a large mortgage to buy a new house - but then reduce this dramatically upon sale of our old one. Objective would be to pay off the new mortgage by the time we are 55.

My relative is happy to do this. We're a very good credit risk and they would receive a better return than available anywhere else. We would draw up a loan agreement covering the arrangement in full. We would also make sure our other relatives were happy with it.

Questions:
1. Is this a viable thing to do? Any tax or legal reason why we should not do this?
2. In the context of trading up, would this be as big a help as I think? Or am I overthinking it?

Thanks in advance for all comments, advice etc!

Are you just planning to borrow enough to pay the mortgage?

What about your 20% deposit?

You're probably over thinking it. If your current house is in an area of high demand, it's possible to buy in a chain - you close sale and purchase in same day. You need a buyer who's flexible on closing date (I've a few friends who've sold to cash buyer investors who really don't care, within reason, when they close).

In terms if how quickly the market can move, I went sale agreed on a property less than 4 weeks after putting it on the market (south Dublin).

In terms of tax, if your relative receives interest income, it should be declared for tax. If they were to receive a small gift however, unrelated to the loan transaction, they might not.

It all sounds a bit over complicated to me. And the bank may view it as messing. If I were you I'd keep it simple. Just put your house for sale and tell the EA that you want a buyer who is flexible and who isn't in a chain. Then go looking at houses. If it was me I'd be prepared to smooth the process by perhaps taking a little under the odds for my house, from the right buyer, and pay a little over for a house I wanted.

you are going to need a 20% deposit, so 120-140k and you only have 50k on deposit. You arent going to be moving without selling the current house in a chain transaction i wouldnt have thought.

Hi Truffade,
We did this 2 years ago, bought a new house before selling our old one, our new house required a lot of work, so buying and selling on the same day was not an attractive option.

We did not clear the mortgage on our old house until the house was sold, about 11 months after we bought the new house.

There is no requirement to pay off the mortgage on the old house, when drawing down a new loan. Approach some banks and see what they can do for you.
With your comfortable income you should be ok on borrowing capacity, however your downpayment is small. Banks are looking for 20% down for second time buyers, anything less requires an exception to the central bank rules. I'd imagine they would make an exception in your case, but currently you have less than 10% deposit, which might be a problem for them. Keep on saving and don't make any more lump sum payments on your existing loan for now.

I'm not sure that involving your relative here will improve things for you when looking for a mortgage, you're simply replacing one loan with another, the new one, while lower interest, has a shorter term and higher repayments. If anything this may reduce the amount that a bank would lend.

Hi ruffade

I think it's a great idea. You pay a lower rate on your mortgage and your relative gets a much higher return.

But you should not pay off your existing mortgage until you have bought the new house. It does not help you to buy the new house and might hinder you.

To buy a house for €700k, you will need €120k. So get a loan from your relative of €70k. If he wants to give you more, then borrow more. A lower LTV will get you more options and a cheaper rate.

With a salary of €180k, they will lend you the balance.

Make sure that the loan is below 80% so that you get the lower rates.

Get loan approval to buy without selling.


If you buy a house which needs work, then don't sell your own house.

If you buy a house that is ready to move into to, then put your own on the market.

If the chain works, great. But no need to sweat about it. You should not take a lower price for a quick sale.

If you buy the house without selling your own, then borrow more money from the relative to pay off the mortgage on the old house.

Which lender?
Go for one of the cash back deals. This will be the best value as you intend to pay down your loan quickly.

Another complicated option to consider, although I don't think it's necessary.

Sell your house to your relative for €450k.

You will then have €410k cash in the bank.

The lenders will fight over you.

You can check with the solicitors if it's possible to exchange contracts , get the sales proceeds in full, and defer closing until a third party buyer is found. That way your relative can "sell on" the contract and avoid stamp duty twice.

But even if you have to pay stamp duty it's only €4,500. And, of course, extra legal fees.

Brendan

Thanks guys - all good feedback.

Brendan's first post makes most sense. I will go with that and let you know how it goes.

On the deposit side, the rules seem a bit fiddly. We have 50k cash + 350k equity. Surely banks should be fighting for our custom?

Unfortunately the equity is no good to you if the house isn't sold by the time you're buying.
Yes, the banks would love to lend to you, but the wording of the CBI rules prevent them.

What you could try, but it's a bit messy, is an equity release on your current property, and then use that as your deposit.

I'd talk to your current bank and see what they suggest - you're not the only person in the country trying to trade up.

Completely aside from that - there is no valid reason for you to be paying 3.7% on your mortgage!

And by the way - very best of luck. It's a stressful thing to do moving house without worrying about mortgages as well!