Over the past 12 months, we’ve seen a large increase in the number of private loans between family members.  The “Bank of Mum and Dad” is very much alive and thriving!

For many, especially millennials (and even more so, those living in London), getting onto the property ladder is next to impossible and for some, the Bank of Mum and Dad is a very attractive option.

Parents, families and friends contribute billions of pounds to the property market year on year. In 2017, Legal and General reported that borrowing from the Bank of Mum and Dad had increased by 30% since 2016 and was supporting hundreds of thousands of property purchases.

 

Peace of Mind - Private Loan Agreements

Whilst you may feel that lending money to a loved one is risk free, that’s not always the case.  Family feuds, fallouts and even bankruptcy are sadly very common and, therefore, it’s always a good idea to have peace of mind and a level of protection in place, should an unfortunate circumstance occur. 

Our specialist Private Client team have a wealth of experience drafting private loan agreements and taking appropriate security against property. The terms of the loan can be bespoke to suit your particular circumstance and we can go through this in detail with you.

The Bank of Mum and Dad will normally ask for a range of provisions in their agreements: some are favourable towards the borrower and others are to protect their investment from external events (such as bankruptcy). Some examples include:

  • very low interest rates (if any at all!);
  • a long term, 35 years to life;
  • a small monthly repayment amount, with the balance being repaid upon the sale of the property (or at the end of the term)
  • an obligation to maintain the property and seek permission to sub-let or co-habit;
  • granting a charge over the property (to ensure you’re repaid first following a sale); and
  • provisions to protect the investment upon death or bankruptcy.

Whilst some ask for a nominal repayment each month, in general, the Bank of Mum and Dad don’t expect repayment, on the basis that the borrower will most likely inherit the money in the future.

 

Ranking in Second Place – Mainstream Mortgage Providers

The Bank of Mum and Dad isn’t always in a position to lend the entire mortgage amount and may, therefore, only be providing the deposit.  If this is the case, it’s really important to check what the mainstream mortgage provider’s requirements are and whether they will permit a second charge to exist.  Some will and some will not.

Having a second charge over a property, means that the Bank of Mum and Dad will be repaid after the mainstream mortgage provider has been repaid in full.  It also means that the Bank of Mum and Dad will rank ahead of the repayment of other debts owed by the borrower out of the proceeds of sale of the property. Whilst this isn’t as good as having a first charge, it still provides a degree of protection (presuming that the value of the property is high enough to cover the funds owed to the mainstream mortgage provider and the Bank of Mum and Dad).

Mortgages are regulated by the Financial Conduct Authority, however, the majority of loans from the Bank of Mum and Dad will fall outside of the regulations.

 

Updating Your Will

With the above in mind, it’s also important to consider updating your Will, especially if you intend to have your estate distributed to more than one beneficiary. Our Private Client team also assist and advise you on the terms of your Will and ensure that it complements your arrangements.

So if you are considering making a loan to your family (or friends), whether to assist them with purchasing a property or otherwise, our Private Client team are more than happy to provide further information and talk through how we may assist.

You can contact our Private Client Team on 0161 941 4000 or email lawyers@myerson.co.uk.

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