As we enter 2017, there is a higher-than-normal degree of uncertainty regarding the prospects of the UK economy and the housing market, especially for first time buyers.
With the cost of housing increasing, and mortgages increasingly difficult to obtain or requiring much higher deposits it’s hardly surprising that many people revert to borrowing from their parents or grandparents. We estimate that around £1 billion is lent by parents to their offspring each year and unless there’s a major correction in house prices, this figure is likely to increase.
For most borrowers the bank of mum and dad is far better than a conventional lender: low or no interest, unusually flexible terms plus flexible payment options when the unexpected occurs. A lucky few may even have their loan written off altogether.
However, for many lenders, i.e. the parents or grandparents the process can be less than smooth, and in the worst cases see them unexpectedly losing money that was only ever intended to be a loan.
We see many cases where the best intentions are undermined by what are relatively common events, especially as many of these loans are now long term arrangements as with low wage inflation the ability to pay them off is severely restricted.
A good example is children getting married and then divorced; in such a circumstance your hard earned cash could end up in the hands of a divorcee. Also, parents and grandparents circumstances can change, health can deteriorate and for older ‘lenders’ they may need funds to pay for their own home move or even care arrangements.
So, if you are a parent considering loaning to a child or grandchild we would advise putting in place some safeguards.
If in the future you are, or more to the point, they are lucky enough to have the loan written off then you will have spent a trivial amount protecting your assets. If on the other hand something does go wrong it could be the best few hundred pounds you will have ever spent.
When lending within the family we always advise that the terms and conditions on which that money is lent should be made abundantly clear. In order to protect your money you should make sure that there is a written record of any money given to your child and their partner or spouse in a Loan Agreement, including any terms and conditions of the loan and when it must be repaid.
If the loan is to buy a property that will be registered in your child’s name, consider registering a Legal Charge over the property in your favour. This means that your financial contribution will carry similar significance to that of a mortgage provider. The downside to this is that you will most likely be paying higher rate stamp duty as you will most likely already own a home.
Alternatively, another way to ensure your interest in the property is recognised is to purchase a property with your child as ‘tenants in common’, defining your interests in a Declaration of Trust.
As discussed, you should consider what will happen to the assets, should the child’s relationship break down. There are special rules regarding the marital home on the breakdown of a relationship and therefore it is important you take comprehensive legal advice at the time the money is loaned to ensure the correct safeguards are in place.
If your child plans to cohabit with a partner in a property part funded by you but owned by them, then it is essential your child enters into a Cohabitation Agreement.
This can help protect you and your child against any future claims that could be made by your child’s partner should the relationship break down. A Cohabitation Agreement will regulate the terms of your child’s relationship plus protect your respective interests. If your child subsequently wishes to marry after purchasing a property with your assistance, it is worth considering a Prenuptial Agreement to ring fence any pre-acquired assets in the event the marriage breaks down.
The above only touches on some of the issues. In short if you are loaning money that you can’t afford to write off then we would advise getting some legal advice.