The ‘Bank of Mum and Dad’ not good for family finances
Lawyers from a Finchley-based law firm have reacted to figures which show that the so-called ‘Bank of Mum and Dad’ is now equivalent in size to the UK’s 11th largest mortgage lender by cautioning that parents and children face real dangers from informal lending practices.
Graeme Fraser, a Partner and Head of Family Law at OGR Stock Denton Solicitors, and Tim Crook, a Senior Associate in the firm’s Private Client department, said that parents need to mitigate the risk in intergenerational lending.
“Lending money to anyone, whether privately or commercially, ultimately comes down to trust. This always involves some element of risk because we can never predict the future with perfect accuracy.
“Commercial banks deal with the problem of risk by spreading it across thousands of customers, by carrying out extensive due diligence, by having watertight contracts in place with clear terms and having security against the loan.
“The ‘Bank of Mum and Dad’, by contrast, frequently employs no such measures, with parents often opting to proceed purely on the basis of their trust in their child.
“This potentially leaves parents in a vulnerable position, if their security in retirement relies on the timely return of their money, and their children at risk of taking on more debt than they can afford.
“Not only can parents and children suffer significant financial hardship in the worst cases, where there is a lack of clarity about the terms of a loan, but there will also always be the potential for bitter family disputes to arise.
“Despite the label, the ‘Bank of Mum and Dad’ is not acting like a bank, and that is putting parents and children at risk,” said Graeme Fraser.
Tim Crook added: “The figures highlight the increasing importance of parents taking proper advice when wanting to help their children get on the property ladder.
“They need to consider whether funds should be gifted or loaned or whether they should become joint owners of the property. If they are to make a loan, they need to consider whether any security should be taken. Whichever method is used, it is important that it is properly documented.
“All of these options have implications for inheritance tax, so tax advice should also be sought. Finally, it is essential that parents have fit-for-purpose Wills in place which deal appropriately with any succession or tax issues arising from the above.”