The ‘Bank of Mum and Dad’ has become increasingly popular in financing house purchase transactions in recent years, to the extent that parents and relatives are now amongst the top 10 lenders in the country.
In many instances however, formal arrangements regarding the financial gift or loan provided including repayment arrangements are not put in place. Most of these ‘lenders’ also do not seek legal or financial advice prior to financing the property transaction.
With 34.1% of first time buyers in England now benefitting from a gift or loan from parents or relatives and the actual money being raised from pension pots, property re-mortgage and equity release, consideration, discussion and agreement surrounding all details and ‘what if’ scenarios are vital.
For many parents and their adult children, discussions regarding the financing of deposits, mortgage payments or stamp duty are seen as ‘difficult conversations’ and therefore all too often do not happen. It is almost easier to believe in the ‘happy ever after’ scenario.
Unfortunately, we see all too often parents seeking legal advice after they have provided the money to put towards a deposit for their adult child (and their partner) and sadly the relationship has broken down.
For example, Jack and Jill purchased a new property in their names for £150,000 and with a joint mortgage of £100,000. Jack’s parents made up the balance of £50,000 as Jill’s parents were unable to raise any funds. Jack’s parents deposited the money into Jack’s account and he paid the funds to the solicitor acting on the purchase. The property was purchased in joint names with no declaration recorded as to any interest from the parents or indeed any greater interest for Jack.
Three years later Jack and Jill split up and Jack moves out. The property has increased in value by £10,000 to £160,000 and therefore there is around £60,000 equity in the house. Jack’s parents want their £50,000 back and Jack wants half the increase in equity, £5,000. However, without any recording or protection of their money, and Jill insisting the £50,000 was a gift to both of them, it is highly likely that a court would decide that Jack could have £30,000 ie half the equity and Jill the other half, which would leave his parents significantly out of pocket.
Prior to providing finance, you should legally document the financial assistance being provided, whether this is a loan or gift, repayment terms where applicable and any specific terms and conditions. In the event that finance is provided to a couple, clauses can be included that specify that the finance provided by the parents is returned to them from the proceeds of sale, prior to these being distributed between the couple.
If you have any questions regarding financing a property transaction for a relative or a friend , please contact Nicholas Clough in our Family Law department on 0161 615 5554, by email to firstname.lastname@example.org or by visiting our Altrincham office.