The Bank of Mum and Dad
Figures released recently show that parents are lending their children approximately £5bn a year to help them get onto the property ladder; in fact the “Bank of Mum and Dad” is now considered one of the top ten mortgage lenders in the country.
Due to the difficulties in obtaining mortgage finance and saving enough for a deposit, even if a child is able to buy a house on their own, the likelihood is that this, or indeed a future home, will be shared with a partner.
Break-ups however, are a fact of life and as well as the upset of dealing with the breakdown of the relationship, there are also financial issues to be dealt with, including the home and what happens to the funds so generously provided by the parents.
By Way of a Loan
If the funds provided by the parents are to be repaid, the funds are likely to be far more protected if they were loaned to assist with a house purchase and registered at H M Land Registry. If the funds are to be loaned to a child for a house purchase, this loan should be properly set up in writing and registered by way of a Legal Charge at the time of the purchase. Loan arrangements that only come to light at the time of the breakdown of the relationship are likely to be looked at with some considerable scepticism which only adds to the upset created by the breakdown of the relationship.
By Way of a Gift
Many parents would rather gift the money to their child to assist them with a house purchase rather than loan it to them. Unfortunately, money gifted to children is not automatically protected in the event of the breakdown of that child’s relationship. The likelihood of being given credit for a gift from parents used for the purchase of a house in the event of a breakdown of a relationship will depend on many factors, such as:
- The registered title of the property. Is the property registered in the sole name of the child or the joint names of the child and their partner?
- How large was the amount gifted?
- Did the gift from the parents go towards the purchase of the current home, or was it used for an earlier property?
- The length of time that has passed since the gift;
- The length of the relationship between the child and their partner;
- Who was the gift for? Was it a gift just to their child, or could it be argued that the gift was to their child and their partner as well?
- Whether there are children of the relationship; and
- Whether the couple are married or cohabiting.
If parents would prefer to gift their child money to help them get onto the property ladder, the one way of protecting this gift, in the event of the breakdown of the child’s relationship, would be to ask the child to sign an agreement with their partner. The agreement would need to provide that the gifted funds are protected in the event of the breakdown of the child’s relationship. This is an effective way of protecting money that has been gifted to children.
A Lender and a Gifted Deposit
Where parents provide gifted funds to be used as a deposit and the child is also obtaining mortgage finance, as funds are being gifted by a third party, this raises various additional legal issues which need to be addressed before the transaction can proceed.
The fact that the balance of funds is being provided by a third party must be reported to the Lender, unless the mortgage offer records the fact that the Lender is already aware of this arrangement and is happy to proceed on this basis.
There could also be adverse implications if the parents are made bankrupt soon after the gift has been made. This needs to be considered so that steps can be taken to minimise any potential risk to the children and the mortgage lender.
Using the Bank of Mum and Dad, therefore, may always seem like a very attractive way of helping a child get onto the property ladder. However, this should always be considered very carefully before deciding to proceed in this way because in practice this will always involve far more legal work then many would expect and inevitably results in additional costs.
At Bennett Griffin we are always happy to help prospective purchasers move forward through this process. Should you have any questions about gifting or loaning money to be used in a property purchase, please do not hesitate to contact us.
The information contained in this article is for general guidance only and is not intended to be legal advice. Professional advice should always be taken on the application of the law in any particular situation.