What Happens If You Pay Off Someone Else’s Mortgage?

From a lender’s perspective, there’s generally no reason, legal or otherwise, why they would prevent you from paying off someone else’s mortgage. However, there are a few questions they will likely ask before accepting the repayment funds, mainly from a due diligence standpoint, such as:

• Why are you doing this?
• What is the relationship between the payer and the payee?
• Where is the money coming from to repay the mortgage, and how was it accumulated?

To satisfy anti-money laundering checks and guidelines, a lender must question why this transaction occurs. This includes establishing the source of any funds, particularly large amounts, received into one of their customers’ accounts from a third party who is not being added to the mortgage.

A common example would be if you were the parent of an adult child and you agreed to pay off their mortgage, either as a gift or to assist them during a period of financial difficulty. A lender would likely deem this a plausible arrangement.

What you’ll need to provide to the lender

Before finalising the repayment and closing the mortgage account, a lender may ask for copies of your recent bank statements to clarify the source of funds and verify your identity (passport and/or driving license, etc.).

Some lenders may also request a written statement from you, as the payer, outlining the circumstances under which you’re making this payment. These guidelines are similar to those followed when a third party is paying someone’s deposit for a mortgage.

In specific scenarios, a lender may refuse to complete such a transaction, mainly if there appears to be a tenuous link between the payer and payee. However, in most cases, a lender will comply with your request if there’s a valid relationship (not necessarily familial) and clear evidence of where the money is coming from.

It’s important to note that if you redeem a mortgage within a fixed period, you could pay early redemption charges. Before you proceed, you should review the fine print on your mortgage agreement to see what you’re liable for.

Could you or the payee have any tax liabilities?

Yes, while paying off someone’s mortgage is an incredibly generous offer, there could be potential inheritance tax (IHT) implications for the recipient at some point in the future.

HMRC allows each person an annual gift allowance of £3,000 for IHT purposes. You can give this amount to any number of people each year without the money being added to the value of your estate when you die.

Any money gifted above this amount is classed as a potentially exempt transfer (PET) and will only be considered tax-free if you live for seven years after gifting the money.

How inheritance tax is charged

Inheritance tax is charged at 40% on the total value of your estate over and above the current nil-rate band allowance of £325,000.

For any gift classed as a PET, the tax charge reduces on a sliding scale during the seven-year period as follows:

For example, let’s say you agree to pay off your child’s mortgage as a gift, and the outstanding balance is £120,000. Once paid, this amount would be classed as a PET for IHT purposes.

If you died after five years, and your total estate, including this PET, was higher than the nil-rate band, your child would have a 16% IHT liability on this gift (£120,000 x 16% = £19,200). There would be no tax liability if your estate were below £325,000 when you died.

Suppose you’re considering paying off someone else’s mortgage, especially as a gift for a family member or close friend. In that case, it’s crucial to speak with an experienced tax advisor before proceeding with the transaction. They can help you understand the implications and ensure everything is handled properly.