The crucial contract with the Bank of Mum and Dad
It’s every parent’s wish to do the best for their children, but good intentions can sometimes have unintended consequences and leave everyone with a sour taste and empty pockets.
Take the Bank of Mum and Dad. What better way to help your offspring to get a foot on the housing ladder than by lending, or giving them, a chunk of cash towards a deposit. This has become such a commonplace occurrence that a recent survey by Legal & General found the £6.3billion contributed by the Bank of Mum and Dad in 2019 would make it, collectively, the UK’s 10th biggest mortgage lender.
Around one-in-five of all property purchases in the UK this year utilised the Bank of Mum and Dad in some form. The average amount handed over has risen to £24,100, not an insignificant sum, indeed more money than most of us would handover to anyone without some sort of iron-clad documentation around it.
Yet very few contracts exist between parents and grown-up children over this sort of transaction. And this is starting to cause problems, some very big problems.
When money is given in this way confusion can arise. Is the money a gift - as many mortgage companies will insist - or is it a loan. Has it come from the parent’s savings account, is it from equity release, is it an early inheritance, can the parent really afford it?
The same L&G report found 26% of parents said helping in this way would impact their own finances, delaying retirement or using equity release to fund their own lifestyles. And it’s not just young adults relying on their parents, the Bank of Mum and Dad is still funding people long into their 40s and 50s. And while almost 60% said the money was a gift and didn’t expect it back, there is one set of circumstances which is fuelling huge despair.
One of the biggest purchasers of new homes are new couples. Engaged, cohabiting, newly-weds, moving in together marks a big moment in any relationship. The Bank of Mum and Dad helps fund the purchase and everyone hopes for a happily ever after.
Should that relationship fail, however, both partners will likely be expecting a half share of funds from the sale of the property once the mortgage is paid off. But what about the other lender, the Bank of Mum and Dad? They may have remortgaged, plundered savings and pensions, or gone without, in order to help their child. Now they watch as their child’s ex waltzes off with half of their investment.
Finding that a bitter pill to swallow, parents are increasingly approaching the divorce courts and asking to be considered a creditor as part of the financial settlement. And they are receiving short shrift from judges who, correctly, point to lack of documentation and send them on their way. It’s the same when an unmarried couple separates, the lack of a signed piece of paper is resulting in parent unable to recover their funds.
Knowing that the UK divorce rate is around 40%, the chances of this scenario playing out are relatively high. Yet still most intergenerational lending is done informally with little view to the future. We would encourage people to think about it a little more before writing that check.
? To stop an ex-partner walking away with half of the money you’ve invested for your grown-up child, write a contact.
? To prevent confusion / mis-understanding and subsequent awkwardness / unpleasantness with your child, their partner, or both, write a contract.
? To avoid accusations of unfairness from your other children, write a contract.
? To be certain of getting the money back in some form at some time, write a contract.
? To ensure the repayment is still made in the event of a death, write a contract.
I see it time and time again, parents struggling to establish that it was intended as a loan to be repaid. In the case of relationship breakdown, the problem really comes to a head and those resentments will start to fester.
But peace of mind is not hard to achieve, and it’s not expensive – particularly if you’re lending anywhere near the average of £24,100 !
We could set up a charge on the property which means the loan is paid back upon the sale of the property, usually as the second charge after the mortgage lender. This demonstrates a clear legal intention between the parties.
A loan document would have the same effect, even an IOU would stand some chance of being defended in court. Or there’s even the option of being named as a joint owner of the property, which could also be beneficial in respect of the mortgage terms available with the parent as a guarantor.
If you’ve made the decision to help your child it’s because you want the best for them. So why would you risk losing a good portion of that money if their relationship breaks down? The only way to shore up your investment and ensure your son or daughter benefits to the full, is to get it down in writing.
We offer a free initial consultation for people to talk about their concerns and find out what help we can offer.
Contact Partner Mark Mosley, head of the Family Law Team at Vincents Solicitors.
Telephone 01772 205404