Bank of Mum and Dad

May 27, 2016

Trevor Gay, senior solicitor at Major Family Law, looks at the increasing dependence on financial help from parents when purchasing property – and what happens if the home needs to be sold before any ‘soft loan’ is repaid

There is a shortage of housing in this country. Price increases mean deposits are too high for first-time buyers. Demand in the rental market is leading to a rise in rents with landlords demanding deposits that are greater than the average savings. Inflation is also rising faster than incomes. On top of that, the rising cost of university means many young people are simply unable to afford savings each month.

With pressure from all sides there is little wonder that first-time buyers are struggling to take a step onto the property ladder. In addition, divorce and separation often lead to a division of assets where there are insufficient funds to rehouse both parties.

This leaves many young and not-so-young people unable to meet their housing needs. Many are forced to look to family or even friends for help. The first port of call is usually one generation up: the source of lending which is now referred to as ‘The Bank of Mum and Dad’.

Many parents are keen to help their children – or at least they are scared they might have no other option but to move back home!

Lending from parents to help their children get on the UK property ladder will amount to £5 billion in 2016, according to data from Legal & General. This means the so-called Bank of Mum and Dad will help to finance 25 per cent of all UK mortgage transactions this year – at an average amount of £17,500. If this lending prowess was combined into a formal business, it would be a top ten UK mortgage lender.

For many, these funds are considered to be little more than an advance on inheritance. Often small sacrifices are needed but it is considered worth giving a child, no matter how old, the dream of home ownership.

We all know that your home is at risk if repayments are not maintained and in the worst-case scenario, your money could be lost.

But what if your child is not to live alone? What if the new property is to be enjoyed as a home for their new relationship, or for their new family?

If both parties are making equal contributions, then there is little to worry about. In the unfortunate situation that a relationship comes to an end the proceeds can simply be split.

Advice is needed at the time of purchase to formalise the relationship between a financial contributor and property owners. If the property is simply put into joint names, then on separation, even immediate separation, it could be that funds are simply lost into the joint pot.

It is important to ensure certainty. Recent case law suggests that it is possible for the court to be required to step in and determine the ownership of a property. After extensive consideration of the contributions, at great delay and huge expense, the court can reach a decision that is not what you originally intended.

In the event of a marriage the court will consider the financial needs of the parties. The court would have as a first consideration the housing needs of any minor children. Repayments of a parent’s contribution are a long way down the list, if they give it any consideration. A ‘soft loan’ is almost considered to be non-repayable.

To protect any investment, a simple co-habitation agreement defining the investment and ownership of a property or the registration of a charge will assist the court in deciding whether the monies are repayable, or even prevent litigation.

A simple agreement at the beginning can save heartache and costs in the long run.

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