Many first time buyers rely on parental contributions to help them onto the property ladder. Also known as ‘Bank of Mum and Dad’

Many first time buyers have help from Bank of Mum and Dad when buying their first home.

You will need to consider the following when contributing towards the deposit

If you have decided to help your child by contributing towards the deposit for their new house you should consider whether;

1.The money will be a gift which you will give to them on an unconditional, non-refundable basis?

2.Do you expect to have the money returned to you eventually and if so when?

If the money is to be a gift, you would have no control over what happens to the property because you would have no interest in the property. This means your child could sell, remortgage or share the ownership of the property with a second person and the possible result would be the gifted money would have to be shared in the future by the child with a co-owner when the property was sold.

If you decided to gift the money and were aware that your child was going to purchase the property with another person from the outset, your child should arrange to enter into a Trust Deed with the co-owner.

A trust deed would set out the amount of the value in the property which each co-owner would be entitled to when the property is sold after the repayment of the mortgage. So if you contributed 10% of the purchase price at the beginning, the initial 10% of the sale value would be paid to you after the repayment of any mortgage on the property from the net proceeds of sale.

The Trust Deed would also set out how the remainder of the net proceeds of sale would then be divided between the co-owners and this can reflect the contributions which each owner is intending to make to the mortgage and running costs during ownership of the property.

However, this does not guarantee the full return of the initial deposit money to your child because the value of the property may drop or the amount needed to repay the mortgage and pay the selling costs may mean that the net proceeds of sale do not amount to 10% of the selling price.

If the property sells for more than the original purchase price then your child would benefit from the increase in value of the initial investment.

The Trust Deed can therefore “ring fence” any initial contribution (in percentage terms) made to the purchase of the property for the benefit of your child, and can set out the agreement at the outset between the co-owners. Once the Trust Deed has been entered into between the co-owners, it cannot be changed unless the changes are mutually agreed between them by deed.

You should consider any tax implications or any need to reconsider Estate planning which you may have already put in place in the light of a gift or a loan to your child, and take your solicitor’s advice on the implications.

For example, if you have more than one child you may wish to adjust your Will if you decide to gift money to one of your children in advance of your death, but had intended to give your Estate to your children equally.

Contributing towards the purchase of your child’s first home – What you should know

Contributing towards the purchase of your child’s first home where you expect the monies to be repaid to you on the future sale of the property.

If you have decided to help your child by contributing towards the deposit for their new house and you prefer not to gift the deposit and would like to have the deposit returned at some point in the future, your child would have to disclose that you are intending to retain an interest in the property’s value when they make their mortgage application.

You will also need to decide how you want to secure the return of the loan. This is particularly necessary if your child is purchasing the property with a co-owner because both owners will need to acknowledge that the debt will be due to you on the terms agreed.

To secure the return on the money and ensure you have a controlling influence on the property, you could become a joint legal owner of the property with your child and their co-owner.

Each of your individual shares in the value of the property would then be set out in a Trust Deed showing that you have contributed a certain percentage towards the purchase price and therefore you would receive that percentage of the net proceeds of sale at the time of sale of the property.

None of the legal owners (whether this is just you and your child or you, your child and another co-owner) could sell, transfer or remortgage the property without the agreement of each of you. However you, as a legal owner, would have to be jointly and severally liable for the payments due under the terms of the mortgage and this liability may not be suitable to you because you may have other mortgage commitments or not want such mortgage commitments.

If you do not want to have such a strong element of control and involvement, you could request your child and any co-owner allow you to take a second charge against the property, which would rank after their first mortgage, and would require them to repay you the money they owe you on sale of the property from the proceeds of sale, after they have paid the selling costs and repaid the first mortgage.

If you have a second charge they cannot sell or transfer the property or remortgage the property with a new lender without your consent, but you would not be a joint legal owner and therefore would not have any liability for the first mortgage. The first mortgage lender would need to consent to the arrangement.

The problem with this arrangement is that you are still not guaranteed to get all your money back upon the sale of the property if the value of the property falls and/or the terms of the first mortgage allow linked loan accounts or further draw-downs on the mortgage which may eat into the equity in the property, without reference to you.

If you did not receive the return of all of the money due back to you under the terms of the second charge when the property was sold, the obligation to pay would remain but you would need to seek repayment directly from the co-owners who may not have any other resources to repay you.

A less formal arrangement would be for your child and any co-owner to sign a promissory note which is a statement acknowledging that they have received the money and they are due to pay you the money back on the terms set out in the promissory note i.e. they promise to repay.

This is not secured against the property and so to enforce the repayment terms would be an action directly against the debtors. This arrangement would also need to be disclosed to any mortgage lender at the time of a mortgage application by your child.

Once an initial decision is made as to whether the deposit is to be a gift or a loan, you and your child can then decide which path to take and ask your solicitor to prepare the documents to put in place your arrangements.

It is vital that the documents are completed at the time of completion of the payment to your child or, at the latest completion of the purchase of the property, to ensure intentions are documented and no family disagreements arise in the future.

Help to Buy mortgages explained…

Over the last 12 months the property market has sky rocketed in value and volume. With the pandemic in the background this has given rise to all time low interest rates on mortgage lending.

According to the UK House Price Index January 2021 “UK average house prices increased by 7.5% over the year to January 2021” the statistics also show that at the beginning of the pandemic the average housing price was “down from 8.0% in December 2020”.

Arguably the increase is a reflection on the current housing demand, and the stamp duty holiday has played a part in the housing demand also.

Experienced buyers/sellers and those on the property ladder already aside, there have also been a surge of first time buyers also taking advantage of the all-time low interest rates.

For those who are not fully aware of the Help to Buy Scheme, the scheme allows for a contribution by Homes and Communicates of 20% of the agreed sale price of the property which is ideal for first time buyers. The repayment method is by way of interest only.

For the first 5 years following completion of the purchase you will not pay any interest on the loan however after in year six following completion the interest will become payable.

After that you have to make regular interest payments. If the interest rate on the loan for year 6 is 1.75%. You have to pay 20% of 1.75% of the original purchase price in year 6. These payments have to be made monthly on the first day of each month.

The interest rate is reviewed every year in (usually in April), in line with something called the Consumer Price Index (CPI) + 2%. This is a set of statistics compiled by the government showing how prices have gone up or down.

On repayment by way of sale, remortgage or just expiry of the term as the loan is on an interest only basis you will still remain liable for the 20%. That 20% is not the original 20% borrowed but 20% of the value of the property at the time of the sale, remortgage of just expiry of the term.

If you want to pay off some of the mortgages there is a minimum amount to pay off 10% of current market value, so half of what you owe then. When you pay the rest off, the amount you pay is based on the valuation at that time.

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