The lending power of the bank of Mum and Dad is going from strength to strength, as more parents resort to financially helping their children get on the property ladder. For some, however, the risks outweigh the benefits.
In short, the risk of social impact, be this separation, divorce or bankruptcy, loom large in their thoughts. There are several options available to mitigate these risks and thus increase the likelihood of a loan being made. These can be said to fall into three main areas:
This is for when parents have contributed to the deposit and the deposit can be protected by placing a second charge against the property, assuming the first charge is with the mortgage company. This gives some degree of protection for Mum & Dad and protects the children from any social impact. The protection afforded to Mum and Dad is not full, however, as it is the lender with the first charge who would be able to dictate the sale price of a property.
There are several variations on this theme:
This can be interest-only, which is often rolled up until sale to avoid administration issues. This could be enhanced by either a set amount of capital to also be repaid or a share in the increase in the property value.
This should only be considered if Mum and Dad require income.
This loan would be repayable on sale or upon demand.
For all of the above options, there is a loss of control. Options one and three represent a loss of income for Mum and Dad, whilst options one and two come with additional administration and tax on interest. However, these options do have the advantage of documenting the loan and serves to give protection to all parties.
If an outright gift is made then there is a lack of control and no protection for either party from any social impact. Making a gift does, however, have the advantage of reducing Mum and Dad’s estate for inheritance tax purposes.
A better approach is for Mum and Dad to make the gift via a Protective Gifting Trust. With this, a trust is created and Mum and Dad are the trustees. The gift is made from the trust so it is the trust that owns part of the property thus fully protecting all parties. This may sound great but what about instances where a gift has already been made but not documented? Can anything be done retrospectively for these gifts? The short answer is yes. All we need to do is create a Protective Gifting Trust and simply assign the previous undocumented loan or gift to the trustees.
In short, it makes sense to properly document all loans and gifts to ensure against the worst possible social impacts as a little bit of planning at the start can prevent a whole lot of heartache further down the line. Find out more about how friends and family can support your deposit.