Due to the significant costs of buying a house, many buyers increasingly find saving difficult and may turn to their parents for financial assistance.
The "Bank of Mum and Dad" is a term often used to refer to the financial support parents provide to their children, usually in the form of a private loan secured against the newly purchased home.
In this blog, our Banking Lawyers explore the key considerations when offering financial support through the "Bank of Mum and Dad," including how such loans work, what to include in a loan agreement, legal and tax implications, and how we can assist in ensuring everything is properly documented and compliant with regulations.
What should I consider before making a loan to my children?
Initially, the purchaser should consider their financial position and work out how much they can afford to contribute towards the deposit (generally at least 10% of the purchase price), as well as any ancillary costs, such as stamp duty, solicitor's and surveyor's fees, moving and refurbishment costs.
Generally, the amount loaned by the parents covers some or all of the purchase price, therefore eliminating the borrower's need to secure a mortgage. The loan may also include an amount to cover some or all of the stamp duty payable on the purchase of the property, professional fees and possibly refurbishment costs.
What would a Bank of Mum and Dad loan agreement deal with?
As well as the amount of the loan, you should consider the terms of the loan, which will be documented in a loan agreement, in particular:
- What is the length of the loan? Will it be for a set number of years or tied to an event such as the sale of the property, the death of the lender, etc?
- What are the repayment terms of the loan? Will it be repaid monthly or quarterly, in a similar manner to a traditional mortgage, or will it be repaid via a single payment at the end of the term?
- Will the loan be subject to interest? If so, what rate of interest will apply, and when will the interest be payable?
- Will the loan be secured against the property to be purchased?
Should I seek professional advice?
Once the loan terms are agreed upon, both the borrower and the lender should seek independent legal advice to ensure everything is appropriately documented in a formal loan agreement.
In addition to legal advice, it is also recommended that the parties seek advice from a tax adviser.
A tax adviser can advise on whether a Bank of Mum and Dad loan is appropriate to the circumstances of the parties, as well as the potential tax implications of the loan.
They may also provide advice on alternative options to a Bank of Mum and Dad loan in the context of wider estate planning.
Can I make a loan to other family members or a friend?
Although referred to as a loan from the "Bank of Mum and Dad", this does not necessarily mean that loans can only be made to children. It may be permissible to make a loan to parents, siblings, other relatives or friends.
However, before you do so, seeking appropriate legal and tax advice is essential. Practically, it may also be beneficial to consider the impact this may have on your relationship with the borrower, be they a relative or a friend.
Could a Bank of Mum and Dad loan be a regulated financial activity?
Loans secured against residential property may be subject to the Financial Services and Markets Act 2000 if they meet certain criteria.
Carrying on a regulated activity without authorisation from the Financial Conduct Authority (or without a valid exemption) may be a criminal offence.
As such, legal advice should always be sought before securing a loan against residential property. A one-off mortgage securing a loan to children (or other family members or friends) may not be regulated.
However, the circumstances of each loan arrangement will need to be assessed on a case-by-case basis, including the terms of the loan, the relationship of the parties, and the circumstances of the lender. Our Banking Team are able to provide advice on this issue.
How can Myerson help with Bank of Mum and Dad loan arrangements?
Our Banking team can assist you with all Bank of Mum and Dad loan arrangements. This includes:
- Drafting a Bank of Mum and Dad loan agreement;
- Checking the title of the property to be purchased by the borrower;
- Drafting a charge over the borrower's newly purchased property;
- Negotiating the documentation on your behalf;
- Facilitating completion and registering the charge at the Land Registry; and
- Provide an assessment of whether or not the proposed arrangement is a regulated financial activity.
Contact Our Banking Lawyers
If you require help with any aspect of a Bank of Mum and Dad loan, our Banking team would be happy to provide more information and discuss how we can assist you.
01619414000
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Ryan Fletcher
Senior Associate
Ryan has 6 years of experience acting as a Corporate solicitor. Ryan is the Head of Myerson’s Banking Sector. He has specialist expertise in mergers and acquisitions, complex demergers and restructuring, private equity investment, and constitutional arrangements.
About Ryan Fletcher