We hear a lot about the bank of mum and dad being the answer to buying your first home when lenders refuse to talk to you without a sizable deposit. Indeed parents can often help their children take their fist steps on to the property ladder giving then significant advantage over other first home buyers.
However there are some risks with this mode of finance especially for the parents and first rules need to be established around how the parental contribution will be documented, secured and when it will be repaid.
Documenting the parental loan/gift
You may wish to lend your child some or all of the necessary deposit to purchase their first property. Some parents are able and wiling to gift such a deposit, but may wish to place some conditions on this gift. It does not matter how you decide to proceed, documenting your wishes using the services of a solicitor is a good idea. At the same time seek professional advice as to how to assist the child without putting your own assets in jeopardy.
The money may not be physically available but rather is offered in the form of supplementary equity from the parental family home. Every family will have their own vision as to what they are prepared to offer and on what terms. Failing to document this transaction creates unreasonable risk for the parents and is not a good idea.
Even in the case that the money is a gift an not a loan – you may not wish to offer the gift unless the child agrees to hold the property for at least 5 or 10 years. Parents can be very disappointed to find that after they gift their hard earned money to a child, they live in the house for a year or two, and then sell at the wrong time resulting in a loss of the gifted deposit. To ensure your money is not lost make sure you establish the rules before paying the money over.
Securing the money lent
If the money is a loan, you may need to agree that you will be allowed to place caveat on the property or a second mortgage to stop the child from transacting with the property and not repaying your loan. Remember that people’s circumstances change over time. If you fail to secure your position right from the start – later may be too late.
If lent, how and when will the money be repaid
Parents should establish to rules with respect to the money lent. What interest if any is to be paid? When is the loan to be repaid? This needs to be set out in a document put together by a solicitor. Many parents would be uncomfortable signing a formal loan contract with their child. However things can go wrong. There can be new marriages, divorces, children, or simply a loss of employment and even bankruptcy. To make sure that you do not lose the money lent, it is important that the rules around the loan are formally documented.
Parents who confuse love and devotion towards their children with financial security can find themselves loosing a lot of money with no way of recovering their losses. Prudent behavior from the outset can save everyone a lot of heartache.