As property prices continue to creep up and wages struggle to keep pace, more and more people are turning to the bank of Mum and Dad when it comes to house buying.
Interestingly it’s not just young people desperate to get a foot on the housing ladder that rely on parental assistance, one in five 45 to 55 year olds borrow money from their parents.
The figures were revealed in a study carried out by insurers Legal and General who estimate that £6bn in total will be loaned by the bank of Mum and Dad during 2018.
Borrowing from friends or family for property transactions might have become the norm, but it is important for everyone involved that arrangements of this kind are properly formalised as relying on informal agreements can lead to things going wrong.
The majority of parents (83 per cent) do not put a letter of intent or deed of gift in place to formalise their financial support. Without this, both parents and buyers are left legally vulnerable, and only one in five families agree a regular repayment plan.
My advice is always to put things on a formal footing and to get professional legal advice, so that everyone knows where they stand and the interests of those involved are properly protected. Here are some options to consider:
- If you are providing your child with money towards their home as a gift, the mortgage lender will require you to sign a deed of gift confirming that you have no right to the money once it has been given to your child. Some mortgage providers will also require you to sign another document confirming that you have no interest in the property. Providing money as a gift does mean losing all control over it, so think carefully before doing this.
- You could create a legal charge against the property, establishing a legally binding loan which would be repaid when the property is sold or following repayment of the mortgage. This option means you will recoup your money should your child get into financial difficulties or go through a divorce.
- A declaration of trust is a sensible way of setting out the basis on which the loan is given without affecting the legal ownership of the property. It enables you to clarify things like how proceeds from the sale of the property will be shared between you and what will happen in the event of a relationship breakdown.
- Alternatively you could enter into an arrangement where you own the property jointly with your child. In these circumstances you would be obliged to comply with the terms and conditions of the mortgage and there might be tax consequences related to you owning a second property that you do not live in.
It is fantastic that so many parents are happy to help their children get onto or climb up the property ladder, but when agreeing financial assistance it is important to think about all that could unfold in the future and to take steps to minimise the risks for both parent and child. The best way to do this is to get good legal advice.