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A Helping Hand on the Property Ladder
Your son or daughter is 18 and has left for university, that’s your bit done? Think again. In the current economic climate, mortgage lenders are tightening their lending criteria. Property prices have fallen, and the younger generation are finding it increasingly difficult to obtain a mortgage and consequently finding it near impossible to get themselves onto the property ladder, particularly if they have no or very little deposit to offer.
So, as a result your son or daughter turns to the bank of Mum or Dad.....what do you do? You may think that you either have to wave goodbye to your hard earned cash, or risk them living at home for the next 25 years! This can be particularly problematic if you have more than one child to consider. There is also the worry of how your contribution could be treated if your child’s future marriage/relationship breaks down and there is a dispute over the finances.
Here are a few options for you to consider:
- Joint ownership
There is the possibility of you becoming a joint owner of the property. This would mean that you are named on the property title and you could specify your contribution to the purchase price as a percentage of the value of the property. However, if your son or daughter is obtaining a mortgage in addition to your contribution, then you will have to be a party to that mortgage, which may bring its own difficulties. If they are not obtaining a mortgage this will not be an issue and it will give you greater control over your money as they will not be able to sell or dispose of the property without your consent. However, this may not be ideal for them as it may limit their independence. You will also need to consider possible Capital Gains Tax implications on the sale of the property, as it would not be your principal residence.
You could register your contribution/loan as a Charge against the property i.e. a mortgage. This would be registered on the title and you would be repaid on an eventual resale of the property. It would allow you to specify repayments, or interest, and would have the added benefit of allowing you a ‘power of sale’ should they default on your agreement. As with joint ownership, this is a more formal way of dealing with matters and means that any subsequent remortgage or sale of the property would require your consent. However, if your son or daughter is obtaining a mortgage from a High Street lender in addition to your contribution/loan then the lender’s consent would be required to your Charge.
- Declaration of Trust
This is an option often used by parents. You would not become the legal owner, but by contributing to the purchase of the property you would retain a ‘beneficial interest’ in the sale proceeds. A document known as a ‘Declaration of Trust’ will be created, which will evidence the amount of your contribution, the terms agreed between you and the amount to be repaid to you upon the eventual resale of the property. A restriction will be noted on the title to the property which will make any subsequent buyer aware that the sale needs to be dealt with in accordance with the terms of the ‘Declaration of Trust’. However, this option does not give you the right to force a sale of the property and retrieve your money; you will have to wait until the property is sold before recovering your contribution.
- Gifted Deposit
You could gift the deposit to your son or daughter. However, this does mean that you will never get it back and you must decide whether you can afford to give this money away not just now but in the future. You may also wish to consider what would happen to the Gifted Deposit if your son or daughter subsequently cohabited with their partner (or sold that property rolling the proceeds of sale into a new home with that partner) and then subsequently that relationship broke down. This possible eventuality could in turn be dealt with by a Declaration of Trust which could preserve the gifted monies/deposit for your child only.
We strongly advise that when thinking about any of the above arrangements you consider your own financial circumstances and how it may affect other members of your family. If you would like to discuss the options available to you, then please feel free to contact Jane Witek or Nadia Santry in our Residential Property Department