The Bank of Mum and Dad

For people struggling to scrape together the deposit for a new home, the idea of being able to dip into a pot of readily available cash has a dream-like quality.

The so-called Bank of Mum and Dad – essentially, money provided by parents or other relatives – is a popular resource. According to figures from Legal & General, 27 per cent of buyers will get help from family or friends in 2018. That will translate as the Bank of Mum and Dad lending £5.7bn this year.

The concept is a straightforward one: a sum of money is given or loaned to the house buyer who then usually puts this towards the purchase price. It could be a top-up figure, enabling them to increase their deposit and get a better mortgage deal. Or it could fund the entire deposit, or ease some other financial burden. But whatever the deal struck between parents and children, it’s important to be very clear about the basis on which the money is handed over, and what that means for both parties in the longer term.

Whether you are lending, borrowing, giving or receiving, get legal and tax advice. You need to understand any tax implications, for example if interest is to be charged on the loan. And, while it might seem unnecessary at the time, it is certainly worth getting a legal agreement drawn up in order to avoid disagreements later on about what the payment represented, and the circumstances in which it becomes repayable. The last thing any family would want is a rift brought on by a misunderstanding about the terms of a loan or a gift.

Another possibility is a rift brought about by an expectation that the Bank of Mum and Dad would step in and help out. Parents can feel pressurised into giving up their savings, or releasing equity in their own home, to help out their children, which could adversely affect their own retirement plans. By the same token, those who have received the money sometimes feel interminably obligated towards the people who have bailed them out. Either situation can make for an uncomfortable ongoing relationship. So we advise clients to be aware of the potential problems that can arise, and to be  clear and honest with the other party from the outset.

If this has struck a chord with you, contact a member of our Property team on 01264 353411.