Financial agreements: how the Bank of Mum and Dad can run into problems

Rocketing house prices have led to more and more millennials struggling to get on the property ladder – and turning to their parents for financial help.

It’s known as the ‘Bank of Mum and Dad’ and it’s been reported to be the ninth largest lender in the UK. It even has its own acronym – ‘Bomad’.

In most cases it’s a welcome helping hand – the average UK house price (as of January 2017) was at £234,934, meaning people would need well over £20,000 in savings to get a 10 per cent deposit.

However, there are situations in which the helpful gesture can backfire – especially because unlike a typical high-street loan, money from Bomad doesn’t usually come with lots of formal paperwork and binding agreements.

Here, Browell Smith & Co’s family law specialists explain how to avoid the pitfalls associated with using Bomad.

What can go wrong with the Bank of Mum and Dad?

From a social point of view, it’s claimed that Bomad is creating a bigger wealth divide, as people’s ability to buy homes becomes more dependant on their own family’s wealth and background. It is also claimed that it is artificially propping up house prices, which makes the original problem worse.

However, for the purposes of this blog, we are interested in what can go wrong from a legal perspective.

For a start, it’s likely that the mortgage lender will want the nature of the cash sum to be clarified – ie whether it is a loan that needs to be repaid, or a gift. The lenders can protect their interest in the property, by either entering into a deed of trust or registering a second mortgage over the property, both of which the mortgage lender will need to approve.

Or, the Bomad may not want an interest in the property, but will want the money to be repaid. If that is the case, they need to enter into an unsecured loan agreement with your child and their spouse that sets out the terms of repayment and whether interest is to be charged.

If either of these options are taken, then problems may be reduced. However, at this point, many people take the ‘informal’ option and register the money as a gift, which can cause problems in the future.

You might need to change your will

Some parents will intend the gift to be an ‘advance’ on their children’s inheritance – if this is the case, then you will need to update your will to reflect this.

In addition, and this is a difficult subject to broach (but our job is to ask the difficult questions to make sure our clients are prepared), but what if your child dies? Would the money come back to you, or go to your child’s partner? It’s worth clarifying in advance so everybody knows where they stand.

What happens in the event of a divorce?

The biggest issue comes in the event of a divorce. Despite the idea that parents have ‘lent’ the money to the children, more often than not it’s a gift and does not need to be repaid. It is usually given on a casual, trustworthy basis, and is not backed up by any legal agreements, such as a pre-nuptial agreement.

At Browell Smith & Co, we often find that although every party involved in a financial dispute such as this believes they share a collective understanding of the terms, that is very rarely the case.

If nothing was agreed formally at the time of the purchase, then a divorce court will struggle to reach a conclusion to suit everybody.

What should you do if you want to loan a young couple money?

At Browell Smith & Co, we encounter scores of families who have been torn apart by arguments that have arisen as a result of loose or informal financial arrangements.

It is essential that the Bank of Mum and Dad take their own separate legal advice about the implications of gifting or loaning their children money.

We can help to advise on the best route to ensure no undue heartache is caused, and that the Bank of Mum and Dad’s interests are protected if the relationship in question doesn’t survive.

What else do you need to consider?

As a firm, Browell Smith & Co takes a holistic approach to key issues. Our experience across a range of legal areas means we can give the best advice and service to suit your individual situation.

There are other services to consider as part of the process:

Pre-nuptial agreements

These have an unfair association with doomed celebrity marriages, but they are a more common than you might imagine. They also don’t need to be done before the marriage – we also offer post-nuptial agreements.

A pre- or post-nuptial agreement can reduce the financial and emotional trauma of divorce. It might sound un-romantic, and not what you want to think about whilst preparing for a marriage, but it can deliver peace of mind and actually help the marriage to get off to a solid start.

Cohabitation agreements

Unmarried couples that live together are NOT protected by the same rights as married couple. Living as a ‘common law’ couple provides no protection and has little basis in law.

It can make separation very tricky and lead to long, complex disputes over property division. A co-habitation agreement can help to prevent that and make sure everyone involved is afforded the correct level of protection in the event they do separate.

Declaration of trust

A declaration of trust isn’t what it sounds like – you’re not confirming that you trust someone else – but instead is a legal document which confirms the actual proportions in which owners own their homes. It will confirm the actual amounts originally spent by each party as a percentage, will outline the proportions to be repaid to each homeowner when the property is sold, and specifies the parties’ contributions for the payment of the mortgage and maintenance obligations.

These are useful for preventing arguments as to who gave what at the beginning and who should get what when a property comes to be sold.

If you are considering gifting or lending a sum of money to your children, or advancing an inheritance to them, we strongly recommend getting legal help with the process. We are always available for a no-obligation chat about your circumstances and can point you in the right direction to make sure you, and your whole family, is protected.

Contact our expert team today to arrange a no-obligation chat at any of our offices, in Newcastle, Cramlington, Ashington and Sunderland, or alternatively by 0800 107 3000, to discuss your particular requirements.