The rise and rise of the Bank of Mum and Dad
It's never been so popular - the so-called Bank of Mum and Dad will finance 25 per cent of all UK mortgage transactions this year with lending from parents to their children amounting to £5 billion.
The average amount lent is now £17,500 meaning that if the Bank of Mum and Dad was a formal business, it would be a top 10 UK mortgage lender.
It is certainly our experience that financial assistance from a family member, mostly a parent, is commonplace both for first time buyers and for other purchases.
The assistance though is more often by way of gift than by loan or mortgage. This has been the case for some while now, and there are a number of considerations as a result. The introduction of the new stamp duty surcharge for the purchase of an additional residential property has added to these and increased the need for careful advice.
There are three initial questions or considerations to take into account.
- Is the financial assistance a gift or a loan? A simple question but the answer is not always straightforward. The intention may be for the assistance to be repaid at some point but when it comes down to it, other factors may influence this being required to be declared as a gift.
- Will the buyer require a mortgage from a conventional lender?
- Is there one buyer or more and what is their relationship?
Purchase with a mortgage and family gift
Where there is a mortgage, the conveyancer will usually act for the lender as well as the buyer and so must follow the instructions issued by the lender and look after their interests in addition to those of the buyer.
A buyer will need to give details of the source of funds to their conveyancer. Where this includes third party assistance, typically from parents or another family member, this has to be disclosed by the conveyancer to the lender. This is because it may affect the lenders appraisal of the buyer's ability to afford the mortgage if it thinks the amount has been saved and this is not in fact so. A gift is usually routinely acknowledged and approved.
Most family assistance where there is a mortgage is by way of a gift. We ask (as is common good practice), that family members sign a declaration to confirm the assistance is a gift, to provide evidence of the source of these funds and their identity to meet our money laundering obligations.
Purchase with a mortgage and family loan
Assistance by way of a loan will not be acceptable to a mortgage lender if it is to involve repayments by regular instalments but could be deemed permissible if the repayment was postponed until sale. It will depend on the lender in each case, and the mortgage advisor should be consulted at the application stage.
Protecting the family gift or loan
If the financial assistance is by way of a loan, whether or not the buyer is taking out a
mortgage, the interests of the family member also have to be considered and they should take advice from their own separate conveyancers. They may need to look at their options:
- Being a party to the purchase and on the property title even if they are not to live there.
- Not being on the title but entering into a declaration of trust to specify what their share is.
- Taking a mortgage over the property for the amount of the loan.
More than one buyer
It's a common scenario for a young unmarried couple to be buying their first home with help from parents. Even without a parental contribution, the couple would receive joint ownership advice and if they were contributing unequally they should set out their shares (or how they are to be calculated or determined) in a declaration of trust or 'No Nup agreement'.
The gifting parents in this case may be happy to provide the gift to the couple jointly but when asked, are rarely happy for this to be shared between the couple should they later separate. The declaration of trust can take account of this.
Higher Rate Stamp Duty Land Tax on the purchase of an additional dwelling
The impact of this new tax may, in practical terms, reduce options for family assistance where an interest is to be retained of some sort.
'Mum and Dad' are very likely to own their own home already so by joining in a purchase to assist their son or daughter this transaction would then attract the surcharge as it is a second property for them and they are not replacing their main residence. The fact that one of the co-buyers is making their first purchase does not affect this or reduce the tax payable.
If 'Mum and Dad' were not to go on the title but look to retain their share by providing for this in a declaration of trust, this would not make any difference. This is what is termed a 'bare trust' and the beneficiaries of the trust are treated as the owners.
If 'Mum and Dad' were to take a mortgage or charge over the property to secure their
contribution, this would not result in the surcharge being paid. This option however may not be available where the buyer is obtaining a conventional mortgage as it would require the lenders consent which may not be forthcoming.