First time buyers are finding themselves increasingly reliant on the Bank of Mum and Dad as they struggle to find deposits or negotiate bridging loans to secure their dream home. But family law specialists at Clarke Willmott LLP have warned that reliance on parents could backfire badly in the event of a relationship breakdown – whether yours or theirs! Rayner Grice, family law specialist and partner at Clarke Willmott, says doing business with the bank of Mum and Dad requires the same degree of attention to the small print as any professional financial transaction.
“Although it could seem pedantic to be ticking all these boxes with loved ones, failure to follow the same financial protocols expected at a High Street bank or building society could result in serious problems for all concerned.” Rayner said singles or couples relying on the Bank of Mum and Dad should be aware of a number of possible pitfalls. A study by Aviva has forecast that 3.8 million people aged between 21 and 34 will be living with their parents by 2025, a third more than at present. The number of households containing two or more families is also expected to rise from 1.5 million to 2.2 million. The main reason is the affordability of housing.
According to Legal and General, lending from parents to help get their children on the UK property ladder will amount to £5bn in 2016 – with the Bank of Mum and Dad financing a quarter of all UK mortgage transactions this year at an average cost of £17,500.
Rayner explained: “While this additional source of lending can be a great assistance to those trying to get on the property ladder, careful thought must be given to the arrangement to prevent Mum and Dad losing out in the event of a future relationship breakdown - even if the child is not in a relationship at the time.
“Families shouldn’t to be coy when making these arrangements. Should parents decide to advance money to their child then consideration must be given to the position of any current or future partner that they may be living with.
“If the property is being bought by their child and a partner then there must be clear discussion as to whether they intend their contribution to be a gift or to acquire a beneficial interest in the property.
“If it is to gain an interest then clear legal advice must be taken by all parties to ensure that interest is protected not only if there is a breakdown in the parent’s relationship with the child but also a breakdown of the relationship between the child and their partner.
“If the parents do not register their beneficial interest then that initial advancement of money could be lost. Even if the child is single at the time the monies are advanced, if they subsequently cohabit and that partner makes contributions to the property then the parents could find themselves involved in very complex and expensive civil litigation under the Trusts of Land and Appointment of Trustees Act to try to recover their initial investment.”
Rayner said the worst case scenario would be a breakup or divorce: “If there has been an advancement of monies and there is then a divorce then those monies could become the subject of a dispute between the child and their partner.
“The issue that the Court would need to decide is whether those monies were made as a gift or a loan or with the intention of the parents acquiring a beneficial interest. The parents may find themselves having to intervene and effectively be in proceedings against their own child.
“In those cases the Court would need to determine the parents’ interest first before being able to make decisions regarding the overall financial settlement between the divorcing couple.
“That could prove to be very time consuming and expensive for everyone involved and, if there is no clear agreement, would depend on the Court having to hear evidence regarding intentions and payment at the time the monies were lent.”
Rayner also warns that the trend towards multi-generational households was not without potential pitfalls: “Another way that families are trying to resolve the housing difficulty is to combine their resources and live under the same roof.
“The phrase ‘you can choose your friends but you can’t choose your family’ may ring harder once the novelty of the easing financial pressure has worn off.
“Aside from the complexities of who is responsible for the day to day costs of living there may be complications if one party wishes to bring the arrangement to an end and attempts to release their initial investment.
“This could be either by contribution to the initial purchase price or acquisition of a beneficial interest by way of contribution to mortgage whilst living there.
“If there are no clear agreements regarding what is to happen in the event of “relationship breakdown” then they could find themselves in expensive litigation.
“Whilst the concept of a cohabitation agreement has traditionally been considered for couples who are involved in a “husband and wife” relationship it would also be highly advisable for those living in multi-generational households.”