The plight of young people trying to get on the housing ladder is well known. The days of being able to borrow 100% of the property price disappeared in the fog of the 2008/9 financial crisis. Furthermore, the cost of housing has risen dramatically, increasing by 1,145% since 1980 and predicted to rise a further 17% over the next decade. London residential property solicitors are seeing more young people funding first home purchases through the ‘Bank of Mum and Dad’.
But before handing over a significant sum to your children so they can purchase a property there are several things to consider to prevent a bitter family dispute developing in the future. For example, your son or daughter may be buying a property with their cohabiting partner. If their relationship ends, you may find it difficult to recoup your money if the loan and property purchase has not been structured to protect your interests as a lender.
The top three things to consider when lending or borrowing from the ‘Bank of Mum and Dad’ are:
Ask your property Solicitor to structure the loan to ensure you are repaid
If you have decided to lend rather than gift house deposit money, your residential conveyancing Solicitor will advise that you draw up a loan agreement detailing how the loan is to be repaid. You can also put a legal charge over the property in the same way a bank would if it were providing a mortgage. This will give you the power to sell the property (as a last resort) if your son or daughter and their partner do not repay you, provided there is sufficient equity in the property at the time of sale.
You may also choose to have your name registered on the property’s title, which would give you more control. You and your child and their partner/spouse can purchase the property as tenants in common, with you holding a proportionate share of the property related to the size of the loan. For example, as tenants in common, your son or daughter could hold 40% of the property, their partner 40% and you 20%.
If you are gifting the deposit money, make sure you understand the tax implications
You may choose to gift your children money for house deposits with no expectation of repayment. Whilst this is a wonderful gesture, it can have significant consequences in terms of tax. Inheritance Tax is payable if your estate is worth £325,000 after your death. Married couples can ‘inherit’ each other’s tax-free allowance, raising the amount to £650,000. And if you leave your family home to your direct descendants, you can benefit from the Residence Nil Rate Tax Band of £175,000.
You can give away £3,000 per year tax-free. However, given that the average bank of mum and dad loan/gift is £24,100, rising to £31,000 in London, it is crucial to invest in estate/tax planning advice so you can gift house deposit money without incurring Inheritance Tax at a later date. Our private client team can work closely with your accountant to also plan for second-home Capital Gains Tax if you choose to own part of your child’s property as a tenant in common.
Have your property law Solicitor explain the legal implications of being a guarantor or taking out a joint mortgage
If you do not have the money available to gift or loan part or all of your children’s house deposits, you could consider being a guarantor on their mortgage. Although fewer banks allow for guarantors these days, a mortgage broker will undoubtedly be able to find a willing lender. If you choose to be a guarantor, you must have the lending agreement checked by an experienced Conveyancing lawyer and ensure they fully explain the small print relating to your obligations to repay the mortgage if your child defaults on their mortgage payments.
You can also take out a joint mortgage with your child and their spouse/partner. This will result in you owning part of the property. Some banks will insist that you are aged under 70 at the end of the mortgage term and others will only provide a joint mortgage for interest-only loans.
Want to know more? Come to our live webinar on How Secure Is The Bank Of Mum And Dad?
The above is simply a brief overview of the legal considerations and implications of the ‘Bank of Mum and Dad’. There are many other considerations such as whether or not a lending parent may have an interest in the property under trust law, Consumer Credit Act issues should the relationship between the parents and their child or their child’s partner break down, and allegations of undue influence in the case of a future dispute developing.
On Tuesday, 2nd March 2021, London-based property Solicitors from OGR Stock Denton LLP will be presenting a live webinar discussing all these matters and more. For further information please visit our events page.