The Bank of Mum & Dad – all you need to know…
May is the month of Bank Holidays, but the most widely used bank these days is the Bank of Mum and Dad. This is particularly so when it comes to property purchases and often involves other family members such as grand parents, god parents or kind aunts and uncles.
And it can work really well for both parties, but here I set out some facts and what I would recommend as the ground rules.
Working out whether you can afford a property purchase, be you a first-time buyer or moving on to a bigger property, is not just about being able to make the mortgage payments. Fortunately, with interest rates having been at a low for many years, and many fixed rate mortgages on the market, it is possible to be certain as to your monthly payments. However, there are many other upfront costs that mean a significant lump of cash is usually required to make that move. Stamp Duty, moving costs, refurbishments, and those unexpected expenses can mean that without money in the bank, being able to make the monthly payments from income is just not enough.
Parents are often in a position to contribute to the property purchase, and are keen to help their children move out. Who wouldn’t be. Regain their bathroom, their washing machine and fridge, and most importantly the remote control. We were not designed to continue to remain living with our parents once we have grown up and are in our own relationships and lifestyle. But how is the money paid in a way that means both generations are protected, and feel comfortable. And how to ensure that what is intended as a positive action does not result in an ugly money claim in years to come?
If you are the Parents:
- 1. Once you have decided upon the amount you are able/prepared to contribute, you then need to decide if it is a gift or a loan.
- 2. If it is to be a loan, then this should be documented together with the terms on how it is to be re-paid. Is there to be interest? Is there to be a regular amount paid back, or is it to be paid back when the property is sold?
- 3. If it is to be a gift, then it should also be documented as such. If you do not live longer than 7 years then this gift could be brought back into your estate for Inheritance tax purposes. So are you gifting it free of Inheritance Tax? Do you want to adjust your will to make sure that your other children are treated fairly?
- 4. Is your child buying with a partner? Are you happy for the gift to be to them both or do you want to document that the gift is to your child only and needs to be part of a Declaration of Trust that sets out their share in the property as distinct from their partners? This is not as complicated as it sounds, but if two people are buying a property and are not married, then their shares and financial arrangements during cohabitation should be documented.
- 5. The solicitor dealing with the purchase will need to know about your gift/loan. This is because mortgage lenders and money laundering rules mean there has to be full disclosure as to the source of funds.
Some of these points may be obvious. Some may not, and some may make you cringe. It can be embarrassing to get involved with your own child’s personal relationship especially when they are in the happy place of buying a place together. But family feuds and rifts are caused by the ground rules not being set clearly at the beginning. Far better to do things properly when everyone is happy, rather than when things get tough, and someone in the triangle may need that money out.
If you are the Borrower:
- 1. Discuss your financial needs clearly with your parents. If they are prepared to help you, then they deserve to know the full picture because this banking arrangement has to rely upon trust.
- 2. Disclose the gift/loan to your mortgage advisor and solicitor. And make sure that you clearly understand the costs of your purchase so that you don’t need to go back and ask for more.
- 3. Disclose it to your partner if you wish to protect your right to that share in the property.
- 4. Be absolutely clear that you understand the terms upon which the money is being given to you.
- 5. Take advice on a Loan agreement, and/or Declaration of Trust, Co-hab agreement if buying with a partner.
- 6. Love your mum and dad – this is a big deal!
Happy Shopping! The Bank of Mum and Dad is open on all Bank Holidays.
This editoral is by Melinda Giles at Giles Wilson Solicitors.
For legal advice please call 01702 477 106 or visit one of Giles Wilson's offices: 1711 London Road Leigh, 54 Leigh Broadway, 5 Roche Close Rochford