As the property market continues on its downward trend and mortgages become harder to secure, parents may be caught up in the decision of whether to assist their children in purchasing their first home.
First time home buyers are finding it increasingly difficult to raise funds for a deposit and the associated costs in purchasing and parents are often the first port of call when the ideal property is found.
High street lenders will usually specify that the balance of the money required to purchase the property must be from the borrowers own resources without recourse to further borrowing. The lender will also most certainly impose a condition that their mortgage be the only charge registered against the property, unless they have agreed otherwise.
The point of this is that the mortgage lender does not want their borrower to overextend. They also do not want to entertain competing claims if it becomes necessary for them to enforce their security and initiate foreclosure proceedings.
At the outset, when the mortgage application is submitted, it should be specified how the deposit will be funded. If a loan is to be secured, permission should be sought by your child for a second charge to be registered against the property in your favour. Your charge would then rank behind the mortgage lender’s first charge.
In the event of the mortgage lender taking proceedings for non-payment of their instalments, and the property being sold to recover the outstanding loan and any unpaid interest, you would stand behind the mortgage lender’s claim against the proceeds to satisfy your own loan.
The point is that if you have a registered second charge the property cannot be sold without your loan being repaid. In the event that the sale proceeds are in excess of the amount owed then any surplus will be paid to your child, but should the property be sold for less than the balance due under the loans, your child would remain liable to you for the shortfall.
An alternative to making a loan is to gift the money to your child in which case you would have no claim against the proceeds on sale of the property. That is beneficial from an Inheritance Tax point of view in that if you survive for seven years after an outright gift, that gift is taken out of your estate for tax on your subsequent death.
If you do not want to make an outright gift or make a formal loan, you can record your contribution in a declaration of trust declaring that for instance, when the property is sold you are entitled to the return of your money with or without profit or interest. We must emphasis that such arrangement should be approved by the lender and also your share of any subsequent profit may be liable to Capital Gains Tax.
Parents who are assisting their children often express concerns that a lodger or partner sharing the property may acquire an interest in the property which they themselves have funded which would detract from the gift to the child. It is possible for sharing partners to sign a co-habitation agreement to reduce this possibility and a lodger paying rent would not normally acquire a greater status than licensee only terminable on notice.
The government is considering what help to give first time buyers but in the meantime children are increasingly looking to their parents for financial help. Parents who are able to give such help need to be sure that their interests or the money they give, are adequately protected.