The Bank of Mum and Dad now helps out a staggering 80% of first time buyers with their deposits towards buying their homes; it's reasonable that you'd want to know how to protect your investment if you are among the parents involved.
You want to be clear on whether you are giving the money or expecting it back and if the latter, this can be because you don't want to leave yourself financially exposed even though you want to help your children .
Retirement ages are rising, pension pots are reducing and living costs are generally increasing; all these factors mean many parents would rather lend money than give it away outright. Giving money more than 7 years before you die is a well-known device for reducing the inheritance tax your children will be liable for, but you may not have the finances to do this. You may even want to benefit from an increase in the price of any property you've invested in yourself.
You can do this by drawing up a legally binding agreement which clearly states the arrangement's terms to start with. This includes decisions about what will happen if particular events occur or, say, you want your money back. Share a Mortgage's Shared Ownership Protection covers all these matters, centring on a Declaration of Trust to protect individuals' intentions and interests when jointly buying a property.
Click Shared Ownership Protection to find out more or call one of our experts on 0207 112 5388
Mortgage lending pitfalls when investing in your children’s property
Although there’s such a need from first time buyers to get support from the bank of mum and dad, the legal process is far from simple; especially if you are getting a mortgage. The greatest challenge when wanting to lend your children money to fund their deposit is persuading the mortgage lender to lend and this is why.
Mortgage lenders lend using the property as collateral so that they can repossess, sell and clear their loan should your children stop paying their mortgage repayments. This is the reason they register themselves as the first charge over the property – they are paid first in the event of repossession. Mortgage lenders don’t like having other loans that need repaying in the event of repossession, especially those to parents.
Imagine a mortgage lender provides a 90% mortgage to Jack and Jack got his deposit of 10% from his parents. If Jack doesn’t pay his mortgage and is repossessed, the mortgage lender will look to take possession of the property and look to sell it quickly, normally under current market value. The mortgage lender doesn’t want to have to dispute with another investing party about who gets what, especially when they may need to sell the property 10% under the current market value in order to get their mortgage loan repaid.
How do you lend money if your children are also getting a mortgage?
This is difficult and many mortgage lenders will refuse outright if there is a 2nd loan on the property, however we have a solution that works. If you want to lend your children money and they have a mortgage lender, then this needs to be declared to the mortgage lender as a 2nd charge which will be registered over the title. As a second charge, if the property is repossessed, the first charge is cleared first which may mean your second charge isn’t settled in full; however from the mortgage lender's perspective their mortgage loan is protected.
The downside is if your children’s property is repossessed, you will only be paid after their mortgage lender is repaid in full – a risk that many parents are prepared to take to help their children.
How to protect your investment with your child
Now you know the mechanics of how to lend to your children you now need to have a legal agreement in place to set out the terms of your investment. The greatest mistake most parents make is thinking that a verbal agreement will suffice, as it is with your own children.
The greatest challenge that arises and affects verbal agreements is marriage. Suddenly there is a new party to your verbal arrangement that has rights over your child’s property that can affect your investment. This is the reason why it is so important to have a legal agreement drawn up to protect your investment and to ensure the loan given in good faith is returned in the same fashion.
There are many legal agreements that can be drawn up however most would refer to this particular arrangement as a trust deed as your child is holding your money on trust to repay back to you in the future when they sell the property. The trust deed should be registered as a restriction over the title of the property so that it can’t be sold without you being notified.
The trust deed should include:
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Details of how much you have invested
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What happens when the property is sold?
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Do you get repaid any increase in the property value?
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What happens if the property is repossessed
We provide detailed agreements that can include simple or complex arrangements like this backed with legal support from experts. Our Shared Ownership Protection is tailored to your individual needs and protects your interests when lending money to your children.
