In recent years, first-time buyers looking to get onto the property ladder have increasingly turned to parents for help.
Indeed, so many buyers are now seeking parental assistance that the so-called Bank of Mum and Dad is now the UK’s tenth biggest mortgage lender. An estimated £6.3 billion of financial assistance was provided by parents towards their children’s property purchases in 2018, with Legal & General estimating that parents are lending or gifting an average of £24,100 to help their children onto the property ladder.
If you’re a parent considering lending money to help your children, there are several important factors to consider. Here’s everything you should know if you’re thinking of becoming the Bank of Mum and Dad.
Act like a banker
If you’re planning to lend or gift a large sum to a child, experts say that you should approach the transaction as a bank would.
Christy Bartlett of Stacks Property Search says: “As bankers, it should be your responsibility to ensure your investment has been a wise one – to protect your own interests and those of the family members you are helping.
“Our advice to parents or grandparents who are gifting or loaning finances for a property purchase is to be clear at the outset about the rules of engagement. If you wait until the perfect property has been found, it’s too late – emotions get in the way, and everything will happen too quickly. You’ll find yourself being the bad guys when you start asking questions and imposing conditions.”
Be involved in the process
One way that you can avoid becoming the ‘bad guy’ is to get involved in the property buying process from the early stages. Explain that you’re happy to offer financial help on the condition you’re involved.
It’s likely that you will have bought more than one property in your life and so you will have useful insight and advice to share. First-time buyers have never been through the process and there are likely to be factors they haven’t considered.
Talk to your child about issues such as:
- What kind of property are they looking to buy? Why?
- Where are they looking to buy? Why this particular area?
- What are their plans for the future? Where they do expect to be in 5,10 or even 20 years’ time? How will that affect the property they buy? Does a property make long-term sense in terms of geography and size?
- How much mortgage can they afford? What will their repayments be?
- Who else might need to live in the property? Is it big enough for children? A partner? Potential sharers (such as a lodger to contribute to bills)?
Don’t lend too much
If you’re thinking of lending or gifting money to your children, it’s important that you work out exactly what you can afford.
Researchers at Legal & General say that ‘digging ever deeper into retirement savings’ means that many older people risked running out of money in later life or having to accept a lower standard of living.
The average amount that parents loan is estimated to be £24,100 so the question is: can you actually afford to provide that amount?
“Before you commit to anything, work out exactly what you can afford, whether it’s a gift or a loan, and if you have other children / grandchildren, whether you’ll be able to do the same for them when the time comes,” adds Christy.
Consider what to do if your child is buying with a partner
If your child is buying with a friend or partner than it’s important for you to set out some conditions.
Christy Bartlett from Stacks adds: “It doesn’t sound romantic, but it’s sensible to talk about things that might not usually be brought up at this stage in a relationship, running all potential scenarios through in conversation.”
It’s important for your child to understand what would happen if their relationship were to end in the future – particularly if they are not married.
In a 2019 case reported in The Times, a couple spend £380,000 on legal fees and costs following their son’s divorce as they did not want their former daughter-in-law to receive half of the £2 million they had provided to help them to buy a house.
Despite arguing that the money was an investment in the property and not a gift, they lost the case.
Why it’s so important to get the paperwork right
The example above shows why it’s so important that, if you are gifting or lending money to a child, you get the correct paperwork in place.
A recent Telegraph Money investigation revealed that there has been a sharp increase in parents taking their children to court over unpaid property loans, with three times as many cases last year than in 2016.
Additionally, the number of cases of parents taking their adult child or child’s spouse to court to retrieve money has increased from around three a month five years ago to around 12 to 15 cases a month, according to Quanta Capital, a company that loans money to those pursuing such cases.
If you’re considering lending money, then it’s important to draw up a trust deed or loan agreement. This does not necessarily have to be a long or complicated document, as long as it is clear to the intention and signed by all parties.
It should contain provisions such as:
- Details about the basis on which the loan has been made
- What will happen to the money if one party died
- What happens if the child and their partner/spouse split up
- Any repayment schedule
- What happens if the parent needs the money back