Can you sell your house and buy it back yourself for less?

After a ‘late’ night discussion – looking at if this is legal/possible….elderly relative has an equity loan against what was a mortgage free house taken out 12 years ago for a new car/travel etc (lots of old people have fallen into this). This loan grows exponentially as they do, to a frightening amount compared to what the original loan was. She can’t get booted out even if she lives donkey years but one day in theory this growing loan could take up the whole value of the house and no inheritance for relatives.

So the options are; stay put do nothing and the above happens. Swap to another loan company at a lower interest rate and the loan still grows but not so fast. Sell up, pay the loan off and move somewhere smaller. A mixture of selling up, paying part of loan off, and moving somewhere a bit smaller but with still some loan outstanding.

Or, could you sell the house for market value but somehow she/relatives then buy it back but at a much reduced amount i.e. enough less to have wiped out the loan. She then stays put and debt is gone. Seemed simple in theory after a few beers.
Any thoughts? Need legal/independent financial advice I know.

Buy it back from whom?

So your elderly relative sells the house at full value to your family
She then pays off the loan and buys house back from you cheaply

Can’t you just pay the loan off for her? same net effect without the legal fees, stamp duty etc

The lifetime mortgage would still have to be repaid out the sale proceeds, so selling for below market value would be counterproductive.

She then stays put and debt is gone

The debt can only be “gone” if someone actually pays the loan company to clear the debt.

No amount of swapping who owns the house will change the amount the loan company want to clear the debt unfortunately.

I would think the original equity loan company has this covered in their T&Cs and any early settlement will come at a hefty price . If you do settle the loan can your elderly relative/ you afford the repayments on the new loan ?

Daft idea in hindsight, funny how it seemed to make sense last night. Bit more digging reveals things called relative/dependant mortgages (with current low interest rates). A working relative transfers the loan to a normal repayment mortgage in their name and pays it off over x years. The dependant stays put. The house is now in the relatives name. The amount owing doesn’t grow and is eventually paid off as per a normal mortgage. Seems the way to go.

I may be being dim but why hasn’t the loan amount been being paid off?

Was the idea that a loan was taken out using the house as security, and that the loan would be paid off once the house was sold (probably upon death).

It seems obvious to me that the law of compound interest means the amount due to be repaid would simply grow and grow over time if no ongoing repayments were being made.

If my above understanding is correct I’m surprised such a loan is possible – say the loan repayable continues to increase and house prices fall – to an extent that the amount you can sell it for is less than the loan – who does that debt then fall to – the estate?

IANA financial adviser but these looks like a scheme doomed to putting your relative in a really weak position – banks do not lend money for fun after all!

I wouldn’t be faffing around with trying to game your way out of this situation, you could end up in all kinds of HMRC/legal trouble. I’d be getting the house sold and downsizing to pay off the loan and get out of the situation…

I only recently found out about these but equity release loans older people have taken on for some quick cash to do something can turn into a real a nightmare:
http://www.theguardian.com/money/blog/2013/mar/16/equity-release-older-people-cash

We had it on my parents house, if I’d bloody known I’d have taken a mortgage out and given them the money myself.

End up taking 75k for a 25k loan which had only been taken out 7 years previously.

I think PePPer has highlighted the main issue here.

A small loan against the house with no repayments could well end up being more than the value of the property depending on the duration of the loan.

The options are to either sell up and pay the loan or for everyone o chip in and pay the loan. I did have the tought that all the familiy members could chip in and “buy” part of the house from the elderly relative and thus pay the loan and have the relative remain. This might be OK if the amount of property sold is in line with the current value (not discounted) otherwise the relative may have to pay rent to avoid any suspicion of avoiding taxes.

Can the relative afford rent payments though?

Otherwise they would – if transfer ownership to even group of relatives – be making a gift with reservation..

It’s also having to deal with a bank thats demanding their money virtually straight after your parents death, i had to clear my parents house out with 7 skips and had 3 days to do it. It was humiliating and thoughtless.

If you can avoid it, do so at all costs!