The Bank of Mum & Dad
The bank of Mum & Dad is one of the fastest growing lenders.
Following the house price shift to a lower gear as reported by BBC.
Finance Monthly welcomed professionals in the housing and property industry about to comment about 'The Bank of Mum and Dad'.
As a property lawyer and also a deep-pocketed generous co-director of my very own ‘Bank of Mum and Dad’ (5 to support; I deserve some sympathy, as well as a cold flannel on the forehead at times), I feel suitably qualified to give some guidance on the topic in relation to property matters.
We are Birmingham’s leading conveyancer for residential property purchases according to official Land Registry data, and a significant number of these transactions are on behalf of buyers looking to take their first step onto the property ladder. In recent years a number of our younger clients have taken advantage (quite literally) of the Bank of Mum and Dad in order to secure a larger deposit that grants access to more favourable mortgage rates and cheaper monthly repayments.
For those parents looking to contribute to the deposit, it’s important to be clear whether the contribution is intended as a gift or a loan.
For many parents, their contribution to the deposit is meant entirely as a gift with no intention to claim a stake in the property or recoup the money at a later date. If this is the case, all mortgage lenders will require a deed of gift document signed by the persons gifting the money which confirms that they understand they have no interest in the property and no right to get their money back directly from the property. Gifted deposits will be free from inheritance tax if the donor lives for seven years after the payment is made.
For those parents who intend the money as a loan, one possible option is to take out a joint mortgage with your child. This may help increase their chances of a successful mortgage application, though you may also have to pay Capital Gains Tax when you come to sell the property as it is not your primary residence and if your share is over the annual CGT allowance.
Another option is to create a second mortgage against the property. This would be repaid out of the sale proceeds. However you would need to gain permission from the mortgage lender first, which may be problematic.
The third option is less formal – a Deed of Trust – which is not registered against the property but sets out the proportions in which the property is held. Many of our clients will be buying with a partner, and whilst parents would happily give money to their own child they may not wish their partner to also benefit in the event of a separation or dispute.
Ultimately, if parents are intending to make any contribution towards a deposit then it is important that they take legal advice to agree on the most suitable course of action.