First Time Buyers - with a little help from the parents

Increasing house prices, together with new affordability rules introduced by lenders mean that First Time Buyers are finding it even harder to take the first step onto the property ladder. The Bank of Mum and Dad continues to be raided by children keen to buy their own home, but finding the requirement for a large deposit, together with the strict new lending criteria, is an almost insurmountable hurdle.

Parents want to help, but are often anxious to protect their investment, if their child is buying jointly with a partner, parents wish to ensure that their contribution is clearly defined in the event of the “dream of buying and moving in together” does not turn out as expected. If things fall apart there may be a worry that a large deposit supplied by a parent might face a claim by a disgruntled ex-partner trying to say that they are entitled to half the “investment” or gift made. This seems unfair but does happen.

The easiest way to protect these funds is to treat the money provided by parents as an investment or loan, and a document can be drawn up which clearly defines the parent’s contribution and allows for repayment (with or without interest or a share of the increased value of the property) on the eventual sale.

However, if a mortgage is being obtained to buy the property the mortgage lenders requirements (so far as third party and or other interests are concerned) may mean that a loan agreement or a registered interest in the property conflicts with the mortgage company’s conditions.

Many lenders have in their standard instructions to solicitors a requirement that if parents or third parties are contributing towards the purchase price, then they must sign a letter confirming the lump sum they are providing does not give them an “interest” in the property. There is also a requirement to confirm that they do not intend to reside at the new property and, that the amount contributed is not repayable (or if it is, the terms upon which the sum is repaid).

Most mortgage companies prefer to call any contribution “an outright gift”, which might not be exactly how the buyers and their “financial helper” might want to regard it. It may be possible to still draw up an agreement between the buyer and contributors but the basic requirement is that any lump sum provided does not give parents any rights or interest in the property as against the mortgage lender. The mortgage company will want full powers to repossess and sell the property in the event of the borrowers default and, therefore, it is essential from their point of view that no interest is either registered against the property or capable of being asserted by any third party.

This does not necessarily prevent any agreement between the borrowers and parents concerning the net proceeds of sale – after repayment of the mortgage, but when parents and children are talking about the terms of any financial assistance, they must be aware that any “agreement” will not have priority to the mortgage company and can almost certainly not be registered at HM Land Registry without the mortgage company’s consent. Any attempt to request consent to the registration of a second charge during the buying process may endanger the mortgage application in its entirety, as most mortgage companies rely on the fact that the borrowers are putting a substantial amount of their own money into the transaction and if they are not the mortgage company regards it as a bigger risk of default. They allow financial help by way of non-returnable gift or payment but anything else may not be accepted.

So when thinking about buying your first property, the starting point is to assess how much you can afford by way of a deposit and if large financial contributions are being made by your parents, you need to consider not only the amount being “gifted” but clearly agree the terms upon which the funds are being given, and record the agreement in writing to avoid any confusion or disputes later.

Contact: Sean Sanders