Many families in the UK provide financial help to their children when it comes to buying a house – but it’s important to be clear if this money is given as a gift or a loan.
As property prices have increased, young people find it harder to get on the property ladder so it’s not surprising that more and more are turning to their parents to help them buy their first home. The so-called “bank of mum and dad” is now the tenth largest lender in the UK and is involved in twenty percent of property transactions.
It is estimated some £6.3billion has been lent to family members during 2019 alone, and that the average loan is £24,100.
However, the number of families ending up in court regarding the financial help given by mums and dads for buying their sons or daughters’ properties has also increased – which is why it is important parents state from the outset if the money is a gift or a loan.
Gift Or Loan Clarity
Before entering into the buying process, make sure you’re clear from the outset if the money you are giving to your son or daughter is a gift or a loan.
This may sound simple but the conveyancing process can complicate matters.
Ask yourself questions including the following:
- Do you want the money to be repaid?
- Does the buyer need a mortgage?
- Does the buyer need a mortgage from a conventional lender?
- Is the buyer purchasing the property alone or with others?
The more detail you have on the purchase itself, the easier it will be to state your intentions clearly. For example, you may want the money to be repaid but depending on mortgage arrangements, it might mean it’s declared as a gift.
Mortgage With A Family Gift
When buying property, the buyer must tell the conveyancer where their funds are from, which in turn the conveyancer has to disclose to the lender. Depending on the source of funds, this could affect the lender’s view of the buyer’s ability to afford the mortgage.
Often, where a mortgage is involved, any family help is by way of a gift rather than a loan.
Mortgage With A Family Loan
Some lenders won’t agree to a mortgage if part of the deposit is funded by other loans – and this includes a family loan.
To treat money from family as a loan can complicate the conveyancing process when the buyer needs a mortgage, and generally won’t be acceptable to a mortgage lender if it involves repayments by regular instalments.
However, there are mortgage companies that may allow a family loan if the repayment is postponed until the property is sold in the future.
What If There Is More Than One Buyer?
Many first-time buyers are young couples who buy with the help of one or other of their parents. The couple would get joint ownership of the property and would need advice on the best way to proceed – it’s a good idea for couples to set out their contributions to the property in a declaration of trust if these are unequal.
A declaration of trust can also be used to state what happens to the gift should the couple later separate.
Protecting The Loan
If your financial assistance to your child is a loan, it’s important that your investment is protected and you should seek advice from your own conveyancer.
Options to consider include:
- Do you want to be on the property title even if you don’t live there?
- Do you want to take a mortgage over the property for the amount of the loan?
- Would you rather enter into a declaration of trust to state what your share is, rather than be on the title?
There are many factors to consider, including Stamp Duty Land Tax. As a lot of mums and dads who lend their children money for their first house purchase already own a house, it may mean exposure to additional tax and that the first-time buyer rate may be lost.
The surcharge would still be payable even if you didn’t go on the title deed but stated your share in a declaration of trust.
If you took out a separate mortgage to cover your share in the property, the surcharge may not be payable but the buyer’s lender may not be happy with this arrangement and may not agree to fund the purchase.
How We Can Help You With Bank Of Mum And Dad Matters
Buying property is a complex process and even more so when the bank of mum and dad is involved – there are many factors to consider to ensure all parties are happy and protected.
You should seek professional advice if your money is not being given as a genuine gift but rather as a loan for your children’s property purchase.
Our conveyancers are experienced at handling a range of conveyancing matters and treat every client as an individual.
We will take the time to understand your situation and establish exactly what your intentions are when it comes to the property buy – today and in the future. This will enable us to give you tailored advice that considers all the details and provides you with the protection you need for your investment and enables your child’s house buy to go ahead in a relatively straightforward and stress-free way.
We will provide advice and guidance at the outset as well as throughout the conveyancing process to ensure you and your children are happy with the property purchase.
To speak to one of our specialist conveyancing solicitors about gifting or loaning money to your children for their house purchase, or about any other aspect of conveyancing law, contact us on 0800 988 3674 or email advice@bartletts.co.uk
