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The “bank of mam and dad” – loans from parents to assist house buying

Last September, the English Law Society had an interesting article on loans from parents to their kids. It noted that the ‘Bank of Mum and Dad’ is now one of the top 10 mortgage lenders.

According to recent UK reports, the combined value of funds contributed by parents towards children’s property purchases will amount to stg£6.5bn in 2017 – a 30 per cent increase on the stg£5bn loaned in 2016. This makes parents a top-10 mortgage lender, if ranked alongside commercial lenders !!!

The prevalence of purchases involving funds from parents means that solicitors need to be up to speed with the rules and pitfalls surrounding these sorts of transactions. The issues on most property lawyers’ radar will relate to lender requirements and anti-money laundering (AML) requirements. However, solicitors should also be aware of the potential family law issues that may arise if the transaction involves a couple, and be able appropriately to highlight these to their clients.

Issues that arise where money is given by parents to children to assist in property purchases :-

  • Is it a Gift or a Loan ? If a gift, then what are the tax implications. If a loan will a loan agreement be drawn up and security required eg mortgage on property in parents’ favour.
  • Lender’s requirements ? If the majority of funding is from a mainstream bank, then what have they to say about mummy and daddy’s additional funding.
  • AML requirements ? the solicitors will need to be satisfied that the funds are from a legitimate source.
  • Family law problems ? if there is a girlfriend or boyfriend / cohabitee /spouse involved then what happens if there is a split-up in the future. If the parties are contemplating marriage or are already married and one of them anticipates being gifted money towards a purchase, you may wish to suggest that they (and/or the parents of the spouse who is receiving the gift) consult a family specialist regarding the option of entering into a nuptial agreement before proceeding with the purchase.
  • Wills may need updating ? clients should also consider updating their wills, to ensure that in the event of their death, the amount gifted either passes back to their parents or to any siblings or grandchildren, rather than to their spouse AND/OR the parents may need the gift/loan to be taken account of in their wills too eg written off; reduce legacy to child etc