First time home buyers often resort to the Bank of Mum and Dad for help in order to get on the property ladder. However, this course of action is not just restricted to first time home buyers. There has been a noted rise in people looking to move up the property ladder, otherwise known as ‘second-steppers’, with the help of family members.
When buying a property with help from family, there are a number of potential issues that might arise in the process.
It is important to establish from the outset whether the help being given and received from a parent or others is by way of a gift or in the form of a loan. It is surprising how often there is a misunderstanding between the giver and the receiver as to what is really intended.
It is important to be aware that mortgage lenders have requirements when family members or third parties are contributing to a purchase price.
If the help is in form of a gift, a mortgage lender will often require the person providing the funds to confirm in writing that it is an unconditional and non-refundable gift and that the person giving the funds will have no interest in the property.
If the parents or person contributing the funds intend this to be in the form of a loan, they will need to take legal advice from a solicitor independent from those acting for the buyers as to how their contribution may be protected perhaps in the event for a relationship breakup, insolvency or some other unforeseen eventuality. They may wish to contemplate protecting their interests by means of a charge over the property, or a restriction noted at the Land Registry on dealing with the property without their consent.
It should be noted that in many cases mortgage lenders will not be happy with the situation where a financial contribution is in the form of a repayable loan and is protected by some form of security.
Solicitors are required by law to check the source of funding for property purchase transactions. If the contribution is being made during the course of the solicitor dealing with the purchase, it is not enough to tell them that a substantial amount of the monies are being gifted by parents. If the funds are being received from anybody other than from the buyers themselves, the solicitors will need to check the source of funding and carry out due diligence money laundering checks.
If parents intend a gift towards the purchase monies of a property to be for the benefit of only one purchaser, perhaps their own child only, when that child is buying with their partner is it then advisable that the property is purchased on the basis that the buyers hold as tenants in common rather than joint tenants and they have drawn up a Declaration of Trust detailing the respective shares of each buyer in the property. If marriage is on the cards, then a Pre-Nuptial Agreement is another means by which unequal contributions towards the purchase price can be noted and protected.
Please note: This article is intended as guidance only. No responsibility for loss occasioned/costs arising as a result of any act/failure to act on the basis of this article can be accepted by Latimer Hinks. In addition, no responsibility for loss occasioned/costs arising as a result of any act/failure to act on the basis of this article can be accepted by the firm.