The Bank of Mum and Dad: Legal Pitfalls and Precautions

By Avi Barr, Partner at BBS Law

In recent years, we’ve seen a significant increase in parents financially assisting their adult children with property purchases. While this generosity can be life-changing for young buyers, it’s not without its risks. As a property lawyer, I’ve observed a concerning trend: parents increasingly finding themselves in legal disputes looking to reclaim these funds following their children’s relationship breakdowns.

The Scale of the Issue

The “Bank of Mum and Dad” is now behind almost half of all first-time home purchases by buyers in their 20s, with the average contribution standing at £25,000. However, disputes typically involve much larger sums, often exceeding £50,000, with some cases involving amounts up to £1 million.

Why is This Happening?

Several factors contribute to this trend:

1. Rising property prices and high interest rates make it challenging for first-time buyers to enter the market without assistance.

2. Many young couples can only afford a property purchase by combining incomes, leading to complications if the relationship ends.

3. Informal arrangements between parents and children often lack proper documentation, making it difficult to prove the nature of the financial contribution later on.

Legal Complications

When relationships break down, what was once seen as a generous gift or informal loan can become a point of contention. Courts tend to view these contributions as gifts unless there’s clear evidence to the contrary. This means parents may struggle to reclaim their money, even if that was never their intention.

The Mortgage Lender Perspective

It’s crucial to note that most mortgage lenders will not approve loans if there are additional parental loans alongside the mortgage. This restriction can make it more challenging for parents to provide financial support through traditional loan structures, often necessitating alternative approaches such as gifting or serving as a guarantor.

Protecting Your Interests

From my perspective as a lawyer, I strongly advise the following precautions:

1. Document Everything – Ensure all financial arrangements are clearly documented in writing. This should include the amount, terms of repayment (if any), and the intentions behind the contribution.
2. Consider a Deed of Trust –  This legal document can protect parents’ interests by clearly stating their stake in the property.
3. Explore Alternative Structures – Given mortgage lender restrictions, consider options like gifting with a separate legal agreement or becoming a guarantor.
4. Seek Professional Advice –  Before making any significant financial contribution, consult with a private client or family lawyer who can guide you through the legal implications and help structure the arrangement to protect all parties.
5. Think Long-Term – Consider potential scenarios, such as relationship breakdowns or changes in financial circumstances, and plan accordingly.

Conclusion

While parental support can be invaluable for first-time buyers, it’s essential to approach these arrangements with caution and foresight. At BBS Law, we’ve seen firsthand the complications that can arise from well-intentioned financial gifts. By taking the right precautions and seeking professional advice, parents can continue to support their children’s property aspirations while protecting their own interests.

Remember, when it comes to property and family finance, an ounce of prevention is worth a pound of cure. If you’re considering helping your child onto the property ladder, don’t hesitate to reach out to our team at BBS Law for expert guidance tailored to your situation.