Protecting the Bank of Mum and Dad

We recently discussed that finance from the Bank of Mum and Dad has become increasingly popular in assisting with the purchase of a property for adult ‘children’. However, with this in mind, what safeguards can be put in place to protect this investment?

From the outset, prior to any money changing hands, agreements should be made and formally documented regarding the finance being provided, whether it is being provided as a loan or gift, repayment terms where appropriate and any specific terms and conditions. Where money is being provided as a loan, a loan agreement should be signed by all parties. Mum and Dad can also register their ‘loan’ as an interest in the property, either by registering a second charge on the property or a restriction on title at the Land Registry.

What should happen if a partner moves in?

Whilst a property may have initially been purchased by one person with assistance from parents or relatives, we regularly see new partners moving into a property at a later stage.

In this instance, in order to protect the investment made, a Cohabitation Agreement should be entered into between the couple. It is often a ‘difficult conversation’ to have, but where parties aren’t married, it is sensible to broach the subject before cohabitation, rather than to sweep any concerns under the carpet and hope everything will work out ok.

A cohabitation agreement sets out who owns what assets and documents in the event of relationship break down, how the property, contents, any savings, etc should be distributed. It can also be used to agree and document the management of finances, therefore providing opportunity to set out any repayment / interest in the property to the ‘Bank of Mum and Dad’.

Where a cohabitation agreement is not entered into and payments are made by the partner towards the mortgage on the property, they can be deemed to have acquired an equitable interest in the property even if they are not registered as an owner at the Land Registry, meaning that they have some claim to a share in the property.

Whilst it may be considered that setting out a cohabitation agreement and discussing financial matters is not the most romantic start to living together, putting this agreement in place ensures that both parties in the relationship are protected and all important financial matters are considered from the outset.

It is only with a cohabitation agreement in place that you can rest assured that the finance provided from the Bank of Mum and Dad, which is regularly raised from pension pots, equity release and property re-mortgage is protected.

If you have any questions regarding financing a property transaction for a relative or a friend or would like to discuss cohabitation agreements, please contact our family law specialist Nicholas Clough on 07538 385956, by email to nicholas.clough@psg-law.co.uk or by visiting our Altrincham office.