Almost half of first time buyers now receive financial help from family members and this trend is set to grow. Unfortunately the trend of families falling out will also grow due to disputes as the correct paperwork to document the financial help is not put in place at the start.
The big issue is whether the money is a gift or a loan. Mortgage Lenders will take into account whether finance for a deposit has been given or lent when assessing what the child can borrow. If it is a gift, then the Solicitor acting in the purchase will have to produce evidence to the Lender that the money is a gift in the form of a letter from the family member confirming the gift.
If the money is a loan then parents and children should be separately represented and the parents should obtain a ‘second charge’ over the property. This is the best protection that they can obtain but if the property is repossessed, the first charge against the property will be in favour of the Bank that provided the mortgage and the parents will only receive a payment on their second charge if there is sufficient equity in the property to pay both lending parties.
If at any point the parents decide to reduce or write off borrowing then this should be formally documented at the time the decision is made as the taxman would in all likelihood require that full or partial loan releases should be recorded in a Deed.
If the child is buying with a partner and the parents are paying their child’s share of the deposit, then a legal agreement should be drawn up so that if they do break up the parents get their money back and the child’s partner has no claim on it.
If you are assisting a family member in buying a property, then legal advice should be sought to correctly document your contribution. Whilst it may seem unnecessary and untrusting, none of us have a crystal ball and it is important that the parties’ intentions are documented in writing to prevent disputes and family fall outs at a later date.