It’s the perfect bank with low interest rates and flexible repayment terms – it’s the Bank of Mum and Dad!
It is estimated that in 2016 this ‘bank’ will lend (or give away) more than £5 billion, provide deposits for 300,000 mortgages and will be involved in 25% of all property transactions.
The question I am often asked by parents is how do I protect the money they propose to lend to their child? This can be particularly important when that child is purchasing jointly with a friend or partner. Luckily I have a number of suggestions:
Become a joint owner
The parents could become joint owners of the property. However this would almost certainly involve the parent in also being a party to the mortgage and would mean they could find themselves having to meet the whole of the mortgage payments if their child stopped paying. There is also the stamp duty increase to consider as the recently introduced 3% additional stamp duty would be payable if the parents already owned a property. There may also be Capital Gains Tax consequences for the parents when the property is sold as they would not qualify for the main residence exemption
Take a second Legal Charge over the property
The parents could take a second Legal Charge over the property. The Legal Charge would be registered against the property and the loan would be repaid (with or without interest) from the sale proceeds after the mortgage lender had been repaid when the property is sold or by monthly payments. This gives very good protection particularly if the child gets into financial difficulty or separates from a joint owner. However the mortgage lender would need to be informed of this arrangement and consent to the second Legal Charge which they are often reluctant to do. In addition the parents would need a separate solicitor to represent them in drawing up the Legal Charge adding to the expense.
Sign a Declaration of Trust
The third option is for the child to sign a Declaration of Trust in which they declare that their parents are entitled to a share of the equity (the amount of money left after the mortgage lender is repaid). In addition a Restriction could be registered against the title to the property ensuring that the child cannot sell the property without the parents being informed. The mortgage lender would need to be informed of the loan from the parents otherwise the child risks committing mortgage fraud.
There are a number of potential pitfalls in lending money to your child to assist with a property purchase and you need to ensure you receive the best advice. Alternatively you could just gift the money to them; they are your flesh and blood after all!