It is becoming increasingly common for first time buyers to need some financial help when buying their first property.
While Government schemes such as Help to Buy and more recently Help to Buy: ISA have offered some would-be property owners a way of getting a ‘foot on the ladder’, it is their parents, unsurprisingly, who are often the first to put their hand in their pockets to help their loved ones purchase a home.
Research carried out by the Centre for Economics and Business Research (Cebr) on behalf of Legal & General earlier this year showed that as of 2016, a quarter of all homeowners received help when buying their home – mostly from parents, but in some cases also from grandparents or friends.
The average amount given is around £17,500, which amounts to £6.9% of the average price. When combined and taken as a whole it means the ‘Bank of Mum and Dad’ are funding around £5 billion of lending on house purchases a year and are one of the UK’s top 10 lenders.
Bank of Mum and Dad
Loan or gift?
When considering whether to lend monies to your children it can be a stressful and confusing time. Of course you want to be able to help them and give them the opportunity to own their own home, but have you considered the following circumstances?
- What happens if your child fails to pay their mortgage?
- What happens if your child dies suddenly?
- What happens if your child gets married or divorced?
- Does this set a precedent for your other children?
- Will you need this money later in life?
All of the above questions should be considered carefully before you hand over any money; they could mean that you or your child could lose out on some or all of the monies provided. Many parents will, perhaps naively, hand over monies to their children unconditionally and this should be avoided wherever possible.
In addition, many high street lenders will request a letter signed by the parents confirming that the monies are a ‘gift’ and are ‘non-repayable’. In many cases parents will sign these letters thinking they have no choice but there are options available to you. Be sure that you do not feel pressured into this and speak to a legal expert.
Formal agreement
The alternative to gifting the monies is to formalise some agreement between yourself and your child, which sets out the terms on which the monies are being provided including the amount, the repayment terms and any conditions or stipulations.
The most common methods are a second charge, essentially a secured loan which is attached to the property and will need to be repaid or transferred on any future sale, or a Declaration of Trust, which would entitle you to a share in the equity of the property in return for providing your monies.
Both options can be tailored to your personal circumstances and will offer far better protection for you against future events than simply providing a gift of the monies.
Nelsons can offer independent advice to parents looking to provide funds for their children and can prepare the necessary agreements where appropriate to secure your funds. We also have expert conveyancing solicitors and can ensure that your family members get the best service and quality advice for their home move.
To discuss your circumstances or arrange a meeting with a member of our Property Team, please contact us or call 0800 024 1976 and we will be happy to assist.