Deposits from the "bank of mum and dad"

As the size of deposits required for property purchases increases, it’s not surprising that many first time buyers need help from their parents or family members to achieve the required amount.

However, the combination of family members and large sums of money can be fraught with problems. There are tax implications, legalities and mortgage options which you must understand when you are buying with the help of the “bank of mum and dad”.

This is further complicated if the couple buying the house, later split up and the money that was from one set of parents becomes a point of dispute.

First, let’s look at the money at the point of buying the property. Michelle Petersen, Conveyancing Solicitor, gives a summary of what should be considered.

A gift or a loan?

Firstly, is the money being given or lent? Most mortgage lenders require the money to be a gift and ask for a letter from parents confirming that the money does not need to be repaid.

Be aware that if your parents die within seven years of making this gift, the money will be treated as part of their estate and may be subject to inheritance tax. Your parents can give you up to £3,000 per year which will not be counted for inheritance tax, plus, in a year in which you are getting married, they can give you a further £5,000 and the same rules apply.

If your parents loan you the money

Mortgage lenders will take the loan repayments into account when working out how much to lend you for your mortgage, which means you may end up being able to borrow less than if the money was a gift. It is vital to get the loan details established in a formal legal document to prevent confusion and distress if circumstances change. Problems can arise if one of the parents dies and the surviving parent needs the money back to live on or to pass to other children to meet the terms of the dead parent's will.

Declaration of Trust

Michelle concludes by recommending couples have a Declaration of Trust drawn up if parents are either loaning or gifting money for a deposit on a home.

Michelle says “You should get a Declaration of Trust even if the money is being given as a gift. If the marriage or relationship breaks down in the future, the parent cannot legally enforce the money being paid back to them. If money was from one set of parents this can sometimes become a point of dispute during the break up. The declaration of trust states how the equity in the house would be divided if you were to break up with your partner. The cost of a declaration of trust is very small and it is a good safety net to save bigger problems if the relationship does break down.”

There are other options which people occasionally take when buying a first property and needing family help:

Buying Together

A less popular option is taking out a joint mortgage with your parents. Adding their names to the deeds means both you and your parents are responsible for the mortgage payments.

Pro’s: 

• easier for you to get a mortgage or borrow a larger amount

Con’s:

• if your parents are aged over 50 the mortgage term may need to be shorter than 25 years, as lenders don’t like terms which extend beyond the holder’s 65th birthday
• Your parents must still be working
• Tax implications for your parents if they already own their own home. The property will be viewed as a second home, meaning a higher rate stamp duty and they may be liable for Capital Gains Tax when the property is sold.

Guarantor Mortgage

If your parents are homeowners, with a decent amount of equity in their property, it may be possible for them to act as guarantor for your mortgage. This means they guarantee to pay your mortgage if you can’t afford to.

The catch is that a “charge” will be put on your parents’ property, meaning that if you were to default on your mortgage payments, the lender can pursue your parents for payment. If they can’t pay either then, ultimately, their home could be repossessed.

Our Conveyancing Team is happy to discuss any issues that this raises for you. If you have any questions, you only have to ask us at Frettens. Please call 01202 499255 and Michelle or her team will be happy to chat about your situation and your particular requirements.