Property prices across the country are increasing faster than salary growth. This, coupled with strict lending requirements, means that many young people feel that they are fast being priced out of the housing market.
As many young adults are struggling to pay their monthly rent and outgoings, let alone scrabble together a sizeable deposit, the goal of owning a home is rapidly become a pipe dream. As a result, many individuals are buying with partners prior to marriage, with friends, family or with assistance from others.
There are a range of ways that parents can assist their children to get on to the property ladder, from a guarantor mortgage, a family mortgage or putting forward some capital towards the deposit.
If your (now adult) child has called upon the “Bank of Mum and Dad” to help get on to the property ladder, it is important that you give full consideration to the investment you are making and seek appropriate legal and financial advice. From a legal perspective, it is recommended that you ensure that any investment in property is properly protected and that your intentions about how your contribution should be treated are recorded in writing at the time of purchase. Here’s a short guide to the key considerations for parents:
Protecting your investment
If you are investing a sizeable chunk of money you should think about whether this is an outright gift, a ‘soft’ loan (repayable by your child, but perhaps with less formal repayment terms than a commercial loan), or a sum which you would expect to receive back when the property is sold, perhaps as a formal charge against a property.
How your child owns the property, who they decide to buy with and their status (eg cohabiting with a partner or married) are important factors to take into consideration. They can potentially affect the outcome, and your ability to get your deposit back, if the property is sold, and/or the relationship breaks down.
If your child is living with a partner but is not married, it is important that they (and you) understand the different legal ways in which a property can be owned, and the implications of that ownership.
You should also consider whether you wish to be named as owners of the property, and whether you wish for your contribution towards the property to be properly recorded in writing in a deed of trust. This will set out who has contributed what amount to the purchase price and who will receive what amount when the property is sold in the future. For example, will your investment grow in line with inflation or property price increases, or remain the same?
It can be expensive to litigate about the shares each person owns in a property when the relationship breaks down after cohabitation. Cohabiting couples can enter into a cohabitation agreement, which is a good way of recording the financial arrangements during the relationship, as well as what will happen, financially and practically, if they separate in the future. This can include how the property will be sold, and repayment of any sums due back to parents who may have assisted with a deposit.
A cohabitation agreement can help to avoid the risks of future disagreement and litigation and can detail the financial arrangements during a couple’s relationship, together with provision about what will happen if the relationship breaks down.
Much like a ‘prenup’, many couples see a cohabitation agreement as an ‘insurance policy’ and recognise the benefit of setting an agreement out in writing up front, rather than risking the associated cost and time implications of resolving any disagreement, whether through the court or otherwise, when they stop living together.
Separation after marriage or a civil partnership
If your child gets married or enters into a civil partnership, but the relationship sadly falls apart at a later date and they decide to separate, there is a risk that the court will deem your contribution to the property to be a ‘soft’ loan, ie one that you are never likely to call in. It therefore may be difficult to get this money back, if there are limited financial resources available to the parties, and especially if there are grandchildren involved. Such investment may then be used potentially by a partner and not your child going forward.
It is therefore still advisable to speak to a solicitor about your investment to ensure that it is properly protected, whatever your children’s marital status.
Protecting family wealth in anticipation of marriage
If your child is due to get married or enter into a civil partnership and you think that they may be likely to inherit significant wealth from you, perhaps already have done, or indeed are living in a property which you have contributed significant capital towards, you may wish to consider as a family whether they enter into a prenuptial agreement with their spouse-to-be. You may also wish to consider whether your circumstances merit establishing a trust to endeavour to determine how family assets are received or used by future generations.
A properly drafted agreement, whether a deed of trust, cohabitation agreement or premarital agreement, will be difficult to challenge and is capable of enforcement through the court. An agreement drafted by solicitors will also ensure that the necessary safeguards are in place to defeat the usual challenges to an agreement namely:
- undue influence;
- mistake; and
- illegality on other grounds.
For more information about how you can ensure that your investment is properly protected and for advice about a bespoke agreement for your family’s circumstances, please contact me.
This article first appeared on http://www.tltsolicitors.com on 22 April 2015.