16th May 2017
The bank of Mum and Dad is a fictitious bank referring to parents who lend (or gift money) to their offspring to fund a significant purchase. This is typically for a deposit on a home. Most recently we saw the ‘Bank of Mum and Dad’ reach 9th spot as the largest mortgage lender in the UK, rising from tenth place last year.
In fact, 42% of prospective homeowners in 2017 are likely to receive financial help from friends and family. So why is this on the increase? Well, parents are wealthier now than any previous generation and are now in a better position to help. Ironically this is partly due to increases in property values, the very reason why their offspring needs financial assistance.
In an ideal world it is much simpler if parents from either side of a relationship each chipped in the same amount. However, if it is one sided as it often is, the parent(s) gifting or lending the large sum of money could lose half of the gift should the relationship turn sour. It is callous to consider that your son or daughter could end up like this, but you have to be realistic, it does happen!
There are ways to gift your son or daughter a reasonable deposit and protect it for the sole benefit of your offspring no matter what happens to their relationship. This could be done by a contract, or more commonly in a house purchase, in the setting up of the deeds. There are two ways in which deeds can be set up, ‘joint tenants’ or ‘tenants in common’.
Joint Tenants mean you own the house equally between you and if one dies, the other owns the house outright. However, if one does die, the other owns the house but the mortgage remains in force and still needs paying unless (1) adequate Life Insurance was in place to cover the mortgage, (2) you sell the house or (3) have other means to pay the mortgage off. Joint Tenants is the most common method but does not offer the protection if one side of the party provides a bigger deposit.
Tenants in Common means you each own a share the property but this can be in any split such as 60/40 to reflect a larger deposit from one side. The disadvantage being if one dies and you are not married; your partner’s share of the house will pass to their estate. Without a Will this will mean it will pass to the parents of the deceased partner (except where there are children).
Premier Financial Group is able to discuss Mortgages, Life Insurances and Wills, as well providing advice for setting up the financial arrangements to cover the situations we’ve discussed. For more information just call 01603 750000.