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  • Things To Consider When Using The Bank of Mum and Dad (BoMaD)

    14th November 2017

    Things To Consider When Using The Bank of Mum and Dad (BoMaD)

     

    As we discussed in our blog on 9th Biggest Mortgage Lender – BoMaD the role of parents in buying a home has increased more and more. Despite this lending, many do not put in place a loan agreement.

    Disputes, in life, often centre around money. The last thing you want is a family feud because there is a disagreement over when or how money should be paid back (or that someone didn’t expect to pay it back because it wasn’t properly discussed).

    Lending money for a deposit (or to buy outright) is not as simple as ‘here you go’. Here are the things you need to think about:

     

    1. Loan or gift?

    Seems like a simple question – but actually there are a few things to think about here.

    A gift could be a wiser move for tax purposes. Should your child re-pay the loan and you pass away they may end up paying inheritance tax on the money they have given back if and when they inherit your estate. If this is of concern, you can update the loan to a gift. But, you should keep a record of this by a Deed of Waiver which confirms when the gift was made. Gifts made within seven years of passing are counted within the taxable estate for Inheritance Tax.

    If you are making a loan you should create a formal agreement. This helps to prevent stress and confusion if you later decide you need the money back and prevents misunderstandings over repayment terms. For example, if one parent passes, the loan may be required back for the survivor to live on or to distribute as stated by the will.

    You can draw up an agreement here in around 5-10 minutes

    https://www.lawdepot.co.uk/contracts/loan-agreement/?loc=GB#.WR10wBPyub9

     

    Please note, you should include this loan agreement in the documents you provide to your mortgage company as it will need to be factored into their affordability assessment.

     

    2. Ownership of the property

    Who will the property be legally owned by? This is important because you need to know what happens to ownership of the property and your loan in the event that the worst should happen to you or your child whilst the money is still tied up in the property.

     

    Possible purchase options:

    1. Child buys alone
    2. Child and you are joint owners
    3. Child buys with significant other
    4. Child, significant other and you are joint owners

     

    Scenario 1 is quite a simple scenario as the loan is still between you both and there are no complications when selling.

    Scenario 2 – In the past many parents would support by being a guarantor on the mortgage. This is now less common and parents often take a joint mortgage to help make the mortgage more affordable. This usually comes with the caveat that you also put your names on the title deeds. Why does this matter? As this makes this a purchase of your second property, you are subject to the extra stamp duty rates designed to discourage buy-to-let investors. For a £200k property, stamp duty increases from £1,500 to £7,500. For more information on stamp duty rates see our blog post on The cost of buying a house.

    Scenario 3 and 4 – have you considered what happens if your child splits up with their partner after borrowing the money. A loan agreement will help clarify matters – is the money a joint asset or something that they need to pay back. A pre- or post-nuptial agreement can be used to remove claims from parental loans. Both parents have a right to claim a share of the house should divorce proceedings occur.

     

    You should also consider how this would play out in the event that the worst should happen to your child while the money is still tied up in the property.

    So, how can we structure the ownership?

    1. Joint tenants – if one owner should pass the other owns the property outright
    2. Tenants in common – the deceased person’s share of the house is distributed in accordance with their will

    A loan agreement is even more important where your child and their significant other have purchase the property as joint tenants.

     

    Other things to consider:

    As reported in the Telegraph (Article: “The price I paid for borrowing £90,000 from the ‘Bank of Mum and Dad’”) Consumer psychologist Dimitrios Tsivrikos said there was a hidden cost to borrowing money from parents that some do not consider.

    “It’s not just about keeping up with repayments. If our parents loan us money we also feel under pressure to behave in a certain way to make it look like we’re independent and financially responsible.”

    “It’s an uncomfortable situation as while the children are trying to prove their independence, they’re clearly not as their parents are the ones who have helped them out,” he said.

     

    Overall:

    We advise that you take legal advice to ensure your funds are protected and able to pass back to you should your child pass before you. A loan agreement should be made in any instance and is particularly helpful if investment is made with their significant other as it clarifies matters and makes it clearer how repayments should be made.

    In a discussion with YourMoney (Post: “Should I lend to family and friends?”) Judith Fitton of family law firm Mundays believes all informal loans should be put in writing.

    “If there is no document, the borrower could say in future the loan was just a gift and does not need to be repaid at all,” she warns.

    This is especially important if the borrower defaults, and you pursue redress through the small claims court.

    “Courts view loans from family members as ‘soft’ loans which may not always require repayment. In contrast, a loan evidenced by a formal agreement is considered a ‘commercial’ loan, its repayment factored into any order or settlement,” Fitton says.

     

     

    References:

    www.yourmoney.com

    http://www.telegraph.co.uk/personal-banking/mortgages/price-paid-borrowing-90000-bank-mum-dad/