skifly

Financial Conundrum - maths is letting me down!

18 posts in this topic

Hey Guys,

 

I have a bit of a problem that I am trying to solve but for the life of me I cant remember all that A-Level annuity / present value stuff so I was hoping someone could partially educate me and secondly test some thinking.

 

Before I start with the scenario - yes, I know what I am asking should probably be answered by an IFA / solicitor or someone with some qualifications but logistics currently preclude me doing that.  I appreciate any tips are just that and certainly don't constitute any formal advice (even if you are a specialist in this).

 

So the scenario is this:

Post my dad passing away, we are trying to deal with an odd scenario with a property.  I will not bore you with the detail, but the krux of the issue is this:  My mum is currently trying to help out my sister by providing her with a loan (mortgage) so she can afford to live in a property that is frankly beyond her means (nearly 2x what she can realistically afford).  However as its family, she wants to make sure that whatever she gives to one sibling she does for the other, so she wants to give me a cash lump sum equivalent to the loan amount.

 

She is suggesting the loan is interest free, but includes a written agreement (outside of my question) and charge on the house.  Note that she now realises she might need to account for inflation in the payment amounts too.

 

The challenge: what is the equitable amount to be providing as cash lump sum to keep thing even financially between siblings... and how would you calculate this (educate me!)?

I don't know if this is right, but my thinking is that an interest free loan over 25 years constitutes a significant financial benefit provided to my sibling so you cannot just work it out on a total amount lent = total given to other sibling in cash.

 

For example's sake, lets assume the mortgage was for 100k over 25 years with monthly repayments.

 

Any help working the logic though is very much appreciated!

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Without wishing to pry too much, dare I ask if the reason for the money is to balance out what is being for one sibling to another why giving a lump sum for an aggregate of the same amount is felt NOT to be appropriate or equivalent?

As it is a gesture, seems eminently fair to this simple mind.

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Fair question and I guess part of the problem.

 

To be honest it sounded fair to me too.  Its more queries from another executor of the estate (not that they actually have a say as this is outside dad's estate) that has got me questioning it.  They queried that if they just did Amt/(12months * 25 years) then due to inflation the money returned to mum would be worth significantly less.  Also, they stated that the present value of the mortgage/loan is financially inbalanced to the cash equivalent given now.

 

So mum and sister asked me to work it through, but its been a fair while since I ever dabbled with annuities, present values and all that guff so I am not sure I can work out any number of any use and get the logic right at the same time.

 

Thoughts?

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Can't it (they) just be a gift?  With the normal 7 year reducing tax implications for both sums?

 

If it's classed as a loan to your sister, in addition to the mortgage, won't the mortgage company pull out as it's not affordable then?  OR is it intead of a mortgage?

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Wouldn't it just be easier to speak to an accountant and pay what what be a reasonably small sum for an hour of advice?  At least you know you've done it properly then too.+++

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It's not difficult, people. 

 

Essentially, your sibling is being given a £100k loan over 25 years at 0% interest.  So 25*12 equal repayments are £333.33 each.

 

Without the loan, she would have had to raise that amount via a mortgage.  Using Andrew's link, and its suggested interest rate of 6%, that mortgage would cost her £644 per month.  So the benefit she is getting from the loan being interest-free is the difference between the two, i.e. £311 per month (ignoring the pennies).

 

The question is, what lump sum should you get, which would enable you to draw £311 per month for 25 years, at the end of which there would be none left?  That depends on what interest rate you could achieve, of course.  If you put it into a savings account at (say) 2.5% then we can use the same MSE link to work out what lump sum is needed, because there is a symmetry between a reducing debt and a reducing balance.  Trying out various lump sums iteratively until I hit £311 per month at 2.5% says she needs to give you £69,300.

 

If you have a repayment mortgage at the same 6%, then you could use the lump sum to reduce your mortgage and therefore effectively invest it at 6%.  In that case, £48,300 will do it. 

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Wouldn't it just be easier to speak to an accountant and pay what what be a reasonably small sum for an hour of advice?  At least you know you've done it properly then too.+++

 

I agree, but accountants get grumpy when they have to do 8 am meetings via phone to the other side of this rock we all live on. I am in nz now so logistics is a pain. Plus can't use our usual guy due to conflict of interest. Plus as patently very rightly pointed out, I should be able to work it outo, especially as I am a part qualified accountant! Admittedly it was a long time ago.

 

It's not difficult, people. 

Awesome, cheers patently! That was what I was trying to work out. Now I worked it back it all makes sense!

Legend!

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Patently's fee is the difference between what you get and £100k though :(

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Patently's fee is the difference between what you get and £100k though :(

 

Coffee -----> monitor :roflmao:

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Can I just say this thread has really cheered me up.

Always difficult when commenting on someone's family situation but here it to see that the desire was really to do the "right" thing and not the thing that would benefit you best is very nice to see.

Well done Patently for the working and top man Skifly for the reaction +++

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Even after you've paid him he'll sue you for use of his intellectual property.

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Even after you've paid him he'll sue you for use of his intellectual property.

Nope. Payment creates an implied licence under the doctrine of business efficacy +++

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Hey guys,

 

Yeah its a weird situation as there is even more to add to the complexity which the solicitor for the estate is sorting out.  They cant do this bit though as there is then a conflict of interests between the estate, me as an executor and sister.  So basically we are just taking some time to figure a bunch of stuff out that doesn't cause headaches for people or any undue grief for people.

At the end of the day family is family.  They are your primary support and that goes both ways.  When you lose one of your parents in a way such as this (PD over 12 years) then it does bring home the value of being as one rather than all out for themselves. 

Money is not the issue, doing right by people and the principles is what matters.  Hence the desire to not just be equitable, but also ensuring that some of this complexity we are working through doesn't compromise my mum's lifestyle/future is all important.

 

Anyway guys, cheers for the help (and MrMe's comments).  Very much appreciated!

Edited by skifly
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Anyway guys, cheers for the help (and MrMe's comments).  Very much appreciated!

 

:roflmao:  +++

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I knew I'd read something recently along these lines.

 

I've got almost the exact same scenario just about to happen and caused a major row with my mother. But I shall start a separate thread as i'm really not sure if i'm being an arse hat about it or not.

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