Parental Deposits – Safeguarding the Bank of Mum and Dad

In a difficult economic environment it is increasingly common for parents or even remoter relatives such as Aunts and Uncles to want to help their children/relatives to get on the property ladder.

As lenders want ever larger deposits to secure the best mortgage rates it makes sense for Mum and Dad to top up whatever deposit their children have been able to save for themselves to assist them in buying their first home.

Unfortunately, there are a number of complicating factors in such arrangements. First of all, if a solicitor is acting for both the son/daughter and their mortgage lender, he will have to reveal to the lender where the money is coming from. The lender may not agree to provide a mortgage if the money for the deposit is not coming from the borrower’s own funds and accordingly you will need to consider carefully whether to give your child the deposit funds or to offer it to them as a loan.

If it is a gift it is likely that the mortgage lender will be happy to lend in full knowledge of this but they will require you to sign a deed of gift confirming that you have no right to the money once it has been given to your child and possibly another document confirming that you have no interest in the property. A gift of money leaves you with no control of it, which can be disconcerting if, for example, the son/daughter is buying the property with a friend or partner or if they have shown signs of not being able to deal with their finances in the past. Relying on your child to ‘do the right thing’ when the time comes can be disastrous as one of this firm’s clients found out to his detriment after he realised his son had met a foreign lady, sold the house and taken the deposit with him to another country. Another risk is that the son/daughter take out a further advance against their mortgage or remortgage so that the money you gave them is no longer left in the property.

If you expect to receive some or all of your deposit back when the property is sold or in any other circumstances, it is important that you take legal advice as to your options.

It may be tempting to try to hide a loan from the mortgage lender by calling it a ‘gift’, but in these circumstances not only will you lose control of the money, but you will also be assisting your son or daughter in breaching the terms of their mortgage and potentially committing mortgage fraud.

I am often asked to advise parents on the best way of ‘protecting’ the money used for their son/daughter’s deposit and thankfully there are a number of alternatives. I would mention briefly the following possibilities:

1. Own the property with your child

One method is to own the property jointly with your child. This may help in their mortgage application but in some circumstances, it may be unhelpful, for example if you will be retired before the end of the term of the mortgage, in which case some lenders may not take your wage into consideration or even allow you to be a party to the mortgage. There may also be Capital Gains Tax consequences of owning a property which you do not live in as a primary residence. You would also be jointly obliged to comply with the terms and conditions of the mortgage  – although some parents may feel that they are already ‘obliged’ to help their children in this way regardless of any legal documents.

2. Create a second legal charge against the property

The second option is for the property to be owned by your son/daughter but to create a legal charge against the property. This means that you would have a legally binding loan which would be repaid from the proceeds of sale of the property immediately after repayment of the first mortgage. This would be registered at the Land Registry following completion and noted against the property. This should give you a good degree of protection if your son/daughter either divorces or gets into financial difficulties.

Unfortunately lenders seem reluctant to agree to second legal charges, resulting in parents often giving in and signing the money over as a gift. Each lender is different and sometimes give different answers on a case by case basis. Generally, the smaller the percentage of loan from the lender is in relation to the purchase price, the more likely the lender is to agree a second legal charge. Some lenders offer specialist products which either involve taking a legal charge against the parental home or allow for the parents’ loan to be repaid alongside the lender’s mortgage.

3. Declaration of trust

If neither of the above options are feasible or appropriate, your son/daughter can still execute a declaration of trust. This document determines who owns what share of the net proceeds of sale. A declaration of trust does not affect the legal ownership of the property and offers little or no protection against any debtors but does give a greater degree of protection than simply giving the money away. If a partner, friend, or husband/wife also owns the property, the declaration of trust can allocate the money gifted to your child to his or her share of the property. It can also include provisions such as:

a) A procedure governing the sale of the property in the event of a breakdown of their relationship

b) Agreement as to the division of sale proceeds in the event of a decrease in value of the property below the price originally paid for it

c) What happens if one party pays for improvements or repairs to the property or pays for all of the outgoings for a period of time

d) A right of pre-emption – or ‘first refusal’ for the purchase of the property if one co-owner wants to sell it

e) A method for valuing the property even if the parties fall out

f) What happens if one party moves out and a lodger is taken in

The above provisions are common examples but other provisions can be incorporated as the circumstances may dictate.

In conclusion, there are a number of pitfalls in providing funds for the purchase of a property for a son or daughter. It is essential that you consider your personal circumstances and those of the person the money is being given/lent to and to make sure that the legal documents accurately reflect the arrangement to minimise the risk of later difficulties.

 

Important Note:

The above information is for general guidance and in part may form the opinion of the author. It is based on the law as at the date of this article.  It should not be relied upon in part or in whole as a substitute for independent legal advice.

If you need advice regarding protection of a deposit for a house purchase then please contact the writer, Adam Corcoran, who will be pleased to advise you in light of your personal circumstances. We cannot accept any liability to third parties for the incorrect interpretation or application of the information contained in this article.