Bank of Mum and Dad: How to afford your first house
Published on March 12, 2019
Getting on the property ladder and buying your first house, is about much more than needing your own space. Land will always have value and owning a home not only gives you the ability to grow but also to start your path to secure your future.
With more and more young people living at home with parents/guardians there is a greater opportunity to save money for a deposit. However, this is not always enough as there are so many other costs and outgoings that we have, such as gym memberships, phone bills, travel and going out. The Money Charity highlights how difficult it is to save money for a deposit especially for those who are privately renting and looking to go into the property market. So how do we afford to move out? One way out is by the bank of mum and dad. Mum and dad might gift you money towards your first home, but is it really an unconditional gift or an investment for their future?
The English Housing Survey reported in 2015-2016 that gifts from family and friends had increased and it is becoming a more important source of funds for a deposit. With a turbulent housing market, it is necessary to have a decent deposit to ensure that you can buy a decent home.
If you are a couple purchasing your first home, it is really important to clarify at the beginning how the deposit is being funded and to ensure that any gift is recorded clearly at the time of purchase. If you are borrowing money by way of a mortgage, the lender will need to be informed of any gift, loan or Deed of Trust as this could impact the terms of your borrowing or borrowing capacity. If the unfortunate occurs and you separate, it is easier to revert back to an agreement rather than having to argue about it post-separation. If you are married it gets even harder to repay mum and dad, so it is better to have it all set out before the sale goes through.
So, how do we protect the gift given to us by mum and dad? The simplest way of doing it is to prepare a Deed of Trust which sets out how much money is being gifted and whether it is to be repaid on sale. If you are unmarried, you can have a Cohabitation Agreement prepared by your solicitor assisting you with the purchase. The Agreement will set out everything you and your partner need to record prior to living together, and what would happen upon separation. The usual arrangement is that the money gifted by mum and dad will be repaid upon separation and any money left from the sale of the property is split between you and your partner.
What happens if you are married? It becomes a little more complicated then. A Husband and Wife have an entitlement to a matrimonial home, no matter who owns it; how the deposit was paid or who pays the mortgage. If mum and dad have gifted money for the deposit, then there is no guarantee that they will be repaid upon separation. This is the case even if you bought the house prior to marriage. The best way to secure mum and dad’s money is by putting a charge against the property as this can only be removed once it is repaid or with mum and dad’s consent.
A Deed of Trust can be prepared, however, this can be overridden by the Court in any Divorce proceedings so it is best to make sure that mum and dad’s money is secure. One way to secure the gift of money is to have a Pre-Nuptial Agreement drawn up by a Solicitor. This Agreement is not a precursor to the end of your marriage before it has begun; but a really useful way of managing finances prior to marriage, in the event things don’t work out. More and more young people are learning to handle their finances from a young age, and having a Pre-Nuptial Agreement is a tool to help a couple map out their pre-marital assets and to determine how post-marital assets will be split if there is a separation.
So, is it worth taking money from mum and dad, or will it be a hassle in the future? A gift of money of any sort is a generous thing to have especially if it will help put you on the property ladder and give you independence and an investment for the future. The most important thing is to protect that gift so that you can benefit from it in the long term, and if it is to be repaid then you have thought about how this can be done so that mum and dad get their investment back in one piece.
Poonam is a contributing writer for an online magazine, The Whistle and her article has been featured in their Lifestyle section: see the original article here