With property prices soaring, it’s no wonder that the bank of Mum and Dad is frequently called upon to subsidise the first step onto the housing ladder. But where their grown-up child is buying jointly with their partner and a substantial sum is involved, naturally there are questions over what happens if the couple should split up.
There are various strategies that the lending parents can employ to help protect their investment. The first option is to put a legal charge on the property which can be registered at the Land Registry. This works just like any other mortgage that you might get from a high street lender: there will be a legal document setting out the amount of the loan together with repayment terms, and the borrowers will not be able to sell the property without fulfilling certain conditions (typically, repaying the amount outstanding).
Whilst the charge may sound like the ideal way to protect contributed funds, there is often a problem with this approach: most purchasers will also need the help of a regular mortgage as well. In the absence of a guarantor, lenders usually require borrowers to put down a deposit so that there is some equity in the house. If the borrower then defaults, the equity makes it more likely that the lender will get back most or all of the loan, even if house prices fall. It also allows them to make a quick sale at a discounted price without losing out.
However, if the deposit is just another loan protected by a charge, there is no equity in the house. If unusually the lender were to accept the arrangement, this would be subject to them taking priority (that is, the amount outstanding to them would take precedence over the amount outstanding to the parents if the borrower defaulted and the house was sold) but this then provides little security for Mum and Dad.
Another strategy is to execute a Declaration of Trust. This would set out how the property was owned and how the funds would be distributed if it were sold. The document is legally binding and provides valuable evidence as to the parties’ intentions should a dispute arise in the future. It can record, for example, whether the property is held in shares according to the parties’ initial contributions, or whether the parents’ contribution should be paid back as a lump sum plus a percentage for interest (each option has its merits and disadvantages which should be discussed with an experienced solicitor).
The couple should also execute a Cohabitation agreement setting out matters regarding the property which do not concern the parents such as who should pay the bills and what should happen practically in the event of a split. Issues to consider include whether one party should have the option of buying out the other, how the property should be valued in preparation for a sale, who should pay the legal and other expenses involved in the sale, and who would live in it whilst it was up for sale.
Both the Declaration of Trust and Cohabitation Agreement should be made with the help of a solicitor and each party will need independent advice. In addition, the parents should take advice on matters such as the tax consequences of loaning the money to their child.
To make a no obligation enquiry regarding a Declaration of Trust or Cohabitation Agreement contact Debbie on Southport 01704 532 890 or Liverpool 0151 928 6544 or email firstname.lastname@example.org.