The bank of mum and dad is now reportedly the ninth biggest lender in the UK, with as many as 300,000 children per year borrowing more than £6.5 billion to get on the property ladder.*Parents contributing towards house deposits is often a vital and very welcome support. However, research suggests that it can cause tension within families.
A study found that around a fifth of couples who had borrowed money from their parents found that they expected more of a say day-to-day in their lives and expenditure as a result.
In our work we see the downsides of using the bank of mum and dad every day. The main issue is what happens to the money in the event your son or daughter’s relationship breaks down. Money gifted with the intention of getting your child on the property ladder could end up being split, or even totally lost in a divorce or separation.
There are a few simple solution to this that many people don't realise.
Parents or individuals loaning money or gifting an early inheritance can protect that money by registering an interest in the property or simply entering into a ‘declaration of trust’. A declaration of trust can protect any potential inheritance by confirming the triggers under which money will be returned. This could be in the event of divorce, sale of property or even a request for the money to be returned.
Alternatively, to help protect your investments in your child's future, you could suggest they enter into prenuptial or postnuptial agreement – perhaps even as a condition of the gift – to ensure this doesn’t happen.
You might even be required to sign a form for the bank to confirm whether under any circumstances you would expect the money back.
If the money is a loan and not a gift and you are expecting to be repaid, you may want to think about having a legal agreement drawn up setting out details for the repayment. This can protect you from becoming legally obliged to make contributions towards the mortgage if your son or daughter fails to keep up with the payments.
As a result of taking action to secure your investment and protect your child's inheritance you may find that you feel more able to step back and get less involved with the day to day decisions in your child's relationship.
Giving them the space to do what's right for them while also giving you that extra peace of mind that your hard earned savings won't be used for something you didn't intend.