Getting a foot onto the property ladder is difficult with the increase in house prices, mortgage rate rises and stricter lending criteria. The current cost-of-living crisis and higher interest rates for borrowing mean that young people are turning to the Bank of Mum and Dad, which is now one of the biggest lenders.
Is your assistance a gift or a loan?
It’s important to agree whether the financial offering is a gift or a donation. If you’re a parent and considering helping your child get onto the first rung of the property ladder, you must ask yourself if this is a gift or a loan which is expected to be paid back. For both parties’ interests, it’s best to be open and transparent about the arrangement. If the money is a loan, it’s essential to understand the repayment terms. If it is a monetary gift, both parties should acknowledge that no repayments will be required.
Do most families take an informal approach?
Some parents will gift the money, while others will lend on the understanding that the sum has to be paid back. Legal advice on drawing up a repayment contract is not unheard of. This is important and the contract is drawn up with a potential marital split in mind. Parents may wish for their cash to be viewed as a loan rather than a donation, and if this is the case, the parents and child should enter into a loan agreement.
This will clearly detail the terms and conditions of the loan, including repayment dates and possible interest accrued. A loan agreement such as https://www.parachutelaw.co.uk/loan-agreement will be drafted by professionals who will outline the fact the loan is not a joint asset and is not to be shared between the partners if a divorce should result. This will prevent the child’s partner from making a claim.
What happens if there is no agreement?
If there is no agreement then legal action will be necessary and the court could decide that the cash was a gift and therefore paying it back is not required. Talking about money can be awkward, especially between family members. A solicitor or legal adviser will have experienced many horror stories and fallouts from loan agreements and they will be able to guide you through this minefield. However, the Bank of Mum and Dad is growing, year on year, as housing becomes less affordable. According to The Telegraph, we should celebrate the Bank of Mum and Dad, not try and close it!
Benefits of a gift from the Bank of Mum and Dad
The cash deposit for a house can be a tax-free gift. Provided that the parents survive for seven years following the gift, the money will remain tax-free. It is also beneficial for parents as it helps them to reduce the size of their estate. This can serve to mitigate a future inheritance tax bill, so it is a win-win situation.