The ‘Bank of Mum and Dad’ – Part 2
4th July, 2015
Many first time buyers rely on parental contributions to help them onto the property ladder. In the second of a two-part series, property lawyer Claire Simmons looks at the 'Bank of Mum and Dad'.
If you have decided to help your child by contributing towards the deposit for their new house and you prefer not to gift the deposit and would like to have the deposit returned at some point in the future, your child would have to disclose that you are intending to retain an interest in the property’s value when they make their mortgage application.
You will also need to decide how you want to secure the return of the loan. This is particularly necessary if your child is purchasing the property with a co-owner because both owners will need to acknowledge that the debt will be due to you on the terms agreed.
To secure the return on the money and ensure you have a controlling influence on the property, you could become a joint legal owner of the property with your child and their co-owner.
Each of your individual shares in the value of the property would then be set out in a Trust Deed showing that you have contributed a certain percentage towards the purchase price and therefore you would receive that percentage of the net proceeds of sale at the time of sale of the property.
None of the legal owners (whether this is just you and your child or you, your child and another co-owner) could sell, transfer or remortgage the property without the agreement of each of you. However you, as a legal owner, would have to be jointly and severally liable for the payments due under the terms of the mortgage and this liability may not be suitable to you because you may have other mortgage commitments or not want such mortgage commitments.
If you do not want to have such a strong element of control and involvement, you could request your child and any co-owner allow you to take a second charge against the property, which would rank after their first mortgage, and would require them to repay you the money they owe you on sale of the property from the proceeds of sale, after they have paid the selling costs and repaid the first mortgage.
If you have a second charge they cannot sell or transfer the property or remortgage the property with a new lender without your consent, but you would not be a joint legal owner and therefore would not have any liability for the first mortgage. The first mortgage lender would need to consent to the arrangement.
The problem with this arrangement is that you are still not guaranteed to get all your money back upon the sale of the property if the value of the property falls and/or the terms of the first mortgage allow linked loan accounts or further draw-downs on the mortgage which may eat into the equity in the property, without reference to you.
If you did not receive the return of all of the money due back to you under the terms of the second charge when the property was sold, the obligation to pay would remain but you would need to seek repayment directly from the co-owners who may not have any other resources to repay you.
A less formal arrangement would be for your child and any co-owner to sign a promissory note which is a statement acknowledging that they have received the money and they are due to pay you the money back on the terms set out in the promissory note i.e. they promise to repay.
This is not secured against the property and so to enforce the repayment terms would be an action directly against the debtors. This arrangement would also need to be disclosed to any mortgage lender at the time of a mortgage application by your child.
Once an initial decision is made as to whether the deposit is to be a gift or a loan, you and your child can then decide which path to take and ask your solicitor to prepare the documents to put in place your arrangements.
It is vital that the documents are completed at the time of completion of the payment to your child or, at the latest completion of the purchase of the property, to ensure intentions are documented and no family disagreements arise in the future.
For more information on the issues raised by this article, please get in touch.
Part 1 of this feature can be found by clicking here.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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