How to Protect the ‘Bank of Mum and Dad’
The ‘Bank of Mum and Dad’ is now one of the biggest lenders in the UK. More parents are helping their children get on the property ladder than ever before but at what risk?
Research from the Social Mobility Commission indicates at least a third of first-time home buyers in England depend on money from parents or other relatives.
If you’re giving money to your children to help them buy a home of their own there are some really important questions to ask yourselves first…
Questions for the Bank of Mum and Dad
Before you start passing money to your children to buy a property work out the answers to these questions:
#1. Should we…?
#2. How do we…?
#3. What if…?
The answer to the first question might seem quite straightforward.
It’s unlikely you would want to see your children struggling to afford a home of their own. Unfortunately, lower wages and higher levels of personal debt may be leaving your children with very few housing options.
But even if there are family pressures on you to help the kids out it shouldn’t be at the expense of your own future financial security.
How is the Bank of Mum and Dad going to help with buying a property?
It’s important to decide at a very early stage exactly how you are going to get involved financially with helping children to buy a property.
You might be asked to provide the deposit, or to act as guarantor for a mortgage.
Alternatively, if your finances allow it you might decide to buy the property in your own name. If you do, that could have some tax consequences for you and you will officially be your child’s landlord.
Some people give their children the cash to purchase a property and treat the gift as an ‘advance’ on the children’s inheritance. Others regard it as a loan that should be paid back at some point in the future.
Whichever option you go for it’s really important to understand all of the legal, financial and even moral implications of the choice you make. For example, if you have more than one child are you going to feel obliged to treat them all equally and give cash to the others too?
An extremely important point to consider is what if things don’t work out as you planned. Unfortunately, there is a lot that could go wrong.
Here are a few examples:
- Your relationship with your child or their partner breaks down
- You run into serious financial difficulty in the future
- Your child dies before you
- Divorce, bankruptcy or serious illness affects you or your child
- Other family members are upset by the arrangement
Should the Bank of Mum and Dad think like a bank?
If you’re going to be the Bank of Mum and Dad there’s an argument for saying you should ‘think’ like a bank. What does that mean? Well, the first responsibility of a bank is to consider risk and take steps to minimise it. The Bank of Mum and Dad should be no different.
Think in practical terms how you could minimise the risks and take action accordingly.
These are some suggestions:
#1 Get a clear agreement drawn up between you and your child so that both parties fully understand their responsibilities.
#2 If you’re handing over the cash so that your child can buy the property in their own name, decide at the outset whether it is a gift or a loan. If it’s a loan consider securing the loan against the property to ensure you can be repaid if the property is sold.
#3 If you’re making an outright gift think about the implications if your child died before you or your child got divorced. Would the money come back to you or go to your child’s partner? If you’re not sure take legal advice.
#4 If the gift is intended to be an ‘advance’ on your child’s inheritance you may need to change your Will to reflect this.
# 5 If you’re buying the property in your name or providing a substantial part of the purchase money it might be better to keep that investment outside of your estate. Perhaps setting up a trust would be helpful to keep the property separate, especially if it’s likely to increase in value.
#6 If you’re going to be your child’s landlord get a properly drafted tenancy agreement in place rather than relying on a word of mouth agreement.
What you should do now
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