It is well known that there is currently a housing crisis. With the growing gap between earnings and house prices, home ownership is now at its lowest for over 30 years and home ownership amongst 25 year olds has halved in the same period.
During this time student tuition fees have increased to £9,000 per annum; once students start working and earning over £21,000 per annum, they have to repay 9% of everything they have borrowed.
With the loss of no deposit mortgages and increasing scrutiny of mortgage lenders as to the affordability of the mortgage borrowing, it is little wonder that some parents may wish to help their child get onto the housing ladder and provide some funds for a deposit or more substantial funds to assist with the mortgage.
Whilst it is an eminently understandable wish to assist the next generation, care must be taken before any sums are lent, particularly if a property is to be bought in joint names between a couple who are married or about to get married. A court will typically consider that the matrimonial home is held in joint names even if the contributions to the home have been unequal or the property is held only in one spouse’s sole name.
If there is no document to confirm the sums lent, then in the event of a later divorce, it is very easy for one spouse to argue that the funds were gifted and need not be repaid. This is fine if the funds lent were a gift but it can be very difficult for some parents who have provided those monies to accept, particularly if the marriage is a short one and the separation is acrimonious.
If there is no certainty about whether the monies were a loan or gift, the legal costs of proving the case can be very high and disproportionate. The court will first have to establish whether the funds were expected to be repaid before it can make any decision on a divorce settlement. It is always better to be prudent and agree the terms of any loan before monies are advanced.
This can be done by registering a legal charge which is akin to a private mortgage or preparing a declaration of trust which will set out what the terms of the repayment of the house proceeds are in the event of a separation, divorce or house sale. The costs of preparing those documents are relatively small compared to the costs of arguing what the intentions were years later in the event of an acrimonious divorce. It is particularly important to take legal advice to protect the investment if a grandparent is hoping to occupy a part of the property in years to come and is providing funds to build a granny annex.
The old adage “a stitch in time saves nine” is very appropriate in this type of case, so for those parents who are considering assisting their children with a house purchase, please think carefully to protect the family’s wealth and take specialist advice where necessary.