Gifted deposits from a mortgage lenders perspective
The bank of mum and dad is now one of the main ways in which young adults fund the purchase of property.
Despite BREXIT and the tightening up of the UK’s buy to let market, house prices have continued to increase and at a rate far higher than wages.
Without financial help from mum and dad, many young people would not be able to realise their dream of buying their own home. Recent studies suggest that there has been a 30% increase in the amount loaned to off spring in 2016.
The prevalence of purchase transactions involving parental funding places additional responsibility on conveyancers who need to comply with the mortgage lenders requirements in respect of any parental gift or loan.
At the beginning of any purchase transaction, a conveyancer will need to ask their client how the purchase is being funded. It the client says that parents are providing either the whole or part of the deposit, the conveyancer will need to establish if this is a gift or a loan. Usually it is a gift and often made as part of the parents’ estate planning. However, if it is a loan and the buyer is getting a mortgage to purchase a property, this could cause problems as very few lenders will accept a situation where a parent could potentially assert an interest in the property during the life of the mortgage.
It is important that any parent making a loan to a child for the purpose of purchasing a property, receives their own independent legal advice, particularly if they wish to document the terms on which the loan is being made. They may also wish to register a restriction on the title so that the property cannot be sold without their consent.
The loan as with a gift, will always need to be disclosed to any mortgage lender.
Where the parent is making a gift of money towards the purchase of a property, the conveyancer will need to check to see what the individual mortgage lenders requirements are as they must make sure they fulfil their obligations to the lender. For example, most lenders will ask for bankruptcy searches to be carried out against anyone making any form of contribution to the purchase and they may also insist that the person making the gift is a UK resident and that the funds are in a UK based account. In most cases the lender will want the parents to provide a signed declaration confirming that the money is an unconditional gift with no obligation for it to be paid back and that they do not intend to have any interest in the property.
From a money laundering point of view, a conveyancer will need to establish the source of the gift or loan. They will also need to see evidence of this. For example, if the money has come from the sale of a house or drawdown of a pension or sale of shares, appropriate documentary evidence will need to be provided.
Who can give a gift? As a general rule, the remoter the relationship between the person gifting and the recipient, the less likely the lender is to accept the arrangement. So, where most lenders will be happy to lend on the basis that a parent, spouse, child, grandparent is gifting the deposit, they would be unlikely to accept an arrangement where the gift is from an employer or friend. This is because the lender will be concerned about the possibility of money laundering. It is easy to see why a parent may want to help their children get on to the property ladder, but it is harder to see why a friend or other would do the same unless they were going to receive a benefit such as interest on the loan.
It is likely that the bank of mum and dad will continue to fund deposits for house purchases, and not just for first time buyer off spring, but children looking to sell and move to something more expensive.
Indeed, the bank of mum and dad is now equivalent to the ninth biggest mortgage lender in the UK, lending £6.5bn last year.
If you would like more information on gifted deposits or purchasing a property generally, you can contact David Barton at [email protected] or on 01756 700200