According to recent research by Legal and General (L&G)*, 19% of homes purchased in 2019 will have been supported by the so-called Bank of Mum and Dad. Whilst that is fewer people being supported than last year (25%), the average amount loaned by parents and grandparents, for example, is up from £18,000 in 2018 to £24,100 this year. The total amount of these loans is now £6.3 billion, an increase of 10% on 2018’s total of £5.7 billion. That makes the Bank of Mum and Dad the 11th largest mortgage lender in the UK, making more of a contribution to house purchases than the government’s Help to Buy scheme.
The report says that more people in London will receive help from their parents (41%), with an average loan of £31,000. The average loan from parents in the Yorkshire and Humber region is up on the 2018 figure of £16,900 to £17,200. The under 35s are most likely to receive help, with 62% getting financial assistance from their family. However, 36% of 35 – 44-year-olds and 22% of 45 -54-year-olds will have also received help in 2019.
Are you part of the Bank of Mum and Dad?
Are you one of 250,000 parents, grandparents or other family and friends who it is estimated will contribute over £6 billion to their children’s or other relative’s house purchases this year? If so, what can you do to help them make the right property decisions and are you sure your investment is safe?
Helping your children with their property decisions
You have probably already bought a few properties before and are well versed in what you need to do and what you should look for. You can help your children, especially if they are first time buyers, by getting them to think about:
- How much they can actually afford to pay for their mortgage each month.
- What other bills they are likely to have to consider.
- What sort of property they want, and whether they wish to, or are able to, buy a property that needs renovation.
- Where they want to live and is it an affordable area.
- How long do they plan to live there and do they have further plans for the future.
- Who the house is to accommodate.
- Will they be buying the property with someone else, and how it will be purchased. (tenants in common, joint tenants).
- What help they will need from legal professionals.
- What other costs will be incurred when buying the property.
Protecting your investment
There are several ways in which you can protect your money, but first of all, you need to consider:
- That you are loaning an amount that you can afford.
- Where the money is coming from and how it might affect your future.
- Whether you will need to make a loan to another child or grandchild in the future.
- That everyone fully understands whether the money is a gift or a loan.
- Any conditions of the loan are agreed.
Giving money as a gift
If you decide to give your child a gift, you need to take proper estate planning advice so that you don’t fall foul of strict inheritance tax rules and your child doesn’t end up with an unexpected inheritance tax bill. If you die within seven years of making the gift, your child may have to pay inheritance tax on the value of the gift. If you are ‘advancing’ money to your child from their expected inheritance, you may need to change your will to reflect this. Read more about making a gift on our website.
Lending money to your child
If you lend money to your child to help them buy their home, it is vital that you have a proper legal document drawn up to stop any confusion if your circumstances change. For example, if you die and your spouse needs the money the live on, or to pass on to other beneficiaries of your will.
What can you do to protect your investment?
Many mortgage lenders insist that a contribution from another person is a gift rather than a loan. This can, of course, cause issues for you as a parent, if you worry what will happen to your gift if your child co-habits and then splits up from their partner, or if they die or become bankrupt. You may wish to consider ways in which you can protect your investment.
Declaration of Trust
You may be contributing to your child’s house purchase and worry what will happen to the money if a partner moves in with them. Or you may be contributing to a purchase being made jointly. Either way, you are likely to want to ensure that if the house is sold, the value of the gift does not end up going to your child’s partner. You can do this by entering into a declaration of trust with your child or asking your child and their partner to enter into one, which can state that when the house is sold, the value of the gift you made will go back to your child or to you if it was a loan.
Set up a trust
If you are providing a substantial amount of the money needed to buy a property or buying it in your own name, you may need to set up a trust to keep the property separate from your own estate. Contact our estate planning experts for advice on how to do this.
Buying a share in the property
You could buy the property with your child as tenants in common which means you can specify the actual percentage of the property you own so that when it is sold, you will regain the value of that percentage. This can of course cause some issues with lenders if you will retire before the end of the mortgage term and there may be tax issues relating to you owning the property but it not being your main residence.
Make sure your child has a will
If you give your married child money as a gift, and you don’t want their spouse to inherit it if your child dies before you, ask them to make a will to reflect this. Currently, if your married child died without a will (intestate), their spouse will inherit the first £250,000 of your child’s estate, plus half of everything above that amount, according to the laws of intestacy. You would be very unlikely to get your money back. You can find out more about making a will on our web pages.
What could your child do to protect themselves from losing your investment?
Your child could enter into a cohabitation agreement. This sort of agreement can set out intentions on several matters, including what should happen to any deposit they have put down on the house, which you may have given to your child. It could show whether there was any intention to allow your child’s partner to have any interest in the property and what should happen if their partner has made mortgage payments or paid for any improvements etc. If a cohabitation agreement is properly drafted, it is a legal document that is enforceable by law. You can read more about cohabitation agreements on our website.
Your child could enter into a prenuptial agreement which can set out what should happen in the event of the couple splitting up after they are married. This can include what should happen to the money that you gave them to put into the house. Whilst prenuptial agreements are not yet legally binding in law in the UK, they are accepted more and more by courts as proof of a couple’s intentions. If the couple is entering into a civil partnership, they can have a pre-registration agreement drawn up in the same way. Find out more about prenuptial agreements on our website.
Read the full Legal & General report.
For further information about any aspect of this article, please contact us now. Our property and family law experts will be able to help you.