04 May When banking with mum and dad, beware of the pitfalls
Borrowing from the Bank of Mum and Dad is all very well but home buyers need to be aware of the pitfalls when they tap their relatives for cash, says Tayside based solicitors and estate agents Miller Hendry.
Data just released by Legal & General found that lending from parents to help their children buy a home will help finance 25% of all UK mortgage transactions this year. Loans from the so-called ‘Bank of Mum and Dad’ will amount to £5bn in 2016 – enough to create one of the country’s top 10 mortgage lenders, according to the survey.
With borrowers accepting increasingly large sums from their parents and grandparents – and loans averaging £17,500 – home buyers need to read the fine print when drawing up such agreements, says Miller Hendry.
Here are some need-to-knows when borrowers accept gifts from parents and grandparents:
- Borrowers must disclose to a solicitor and lender how the balance of the purchase price is being provided.
- Lenders should be notified of any gifted deposits at the time of inquiring about a mortgage.
- Lenders are usually happy to approve of gifted deposits as long as they are outright gifts and non-refundable, and as long as no other party has an interest in the property.
- Some lenders require a letter from the donor of the gift confirming that the deposit is non-refundable and unconditional.
- Lenders are less likely to approve loans from parents or grandparents, and will often scrutinise those in more detail.
- Some lenders will only accept such gifts from family members only. Further, there is often a stipulation that donors are UK residents with funds held in a UK bank or building society.
- Some lenders will not allow such gifts to go towards funding a buy-to-let property.
- The donors should consider taking separate legal advice regarding their gift.
- The gift may have tax consequences for the parent gifting the money.
- If the parent does not survive for seven years after making the gift, there may be an inheritance tax liability.
Amanda Frenz, partner in the residential property department at Miller Hendry, said:
“The Legal & General data suggests that the money being borrowed from the ‘Bank of Mum and Dad’ will help to purchase homes worth £77bn this year. There is often a belief that borrowing from your loved ones is a simple, even casual, solution. But, especially given the popularity of this kind of borrowing, it is imperative that people do it right. While we are all for family members helping each other out when it’s needed, we would urge borrowers and donors to have all the facts at their fingertips before they enter into these sorts of financial arrangements.”
For further advice or information on property law or other legal issues, visit www.millerhendry.co.uk