The tough economic climate has seen the so-called “Bank of Mum and Dad” increase its stake in the UK’s mortgage market to help children onto the property ladder, and parents are now far more likely to take action to protect their capital, writes Charlie Davidson, residential property expert with London law firm Bishop & Sewell LLP.
With the high cost of living continuing to bite, the Bank of Mum and Dad is estimated to provide around £17bn through informal gifts and loans each year and is involved in some 50% of housing transactions for those under 55 years of age.
Charlie Davidson, a Senior Associate in Bishop & Sewell’s residential property team, says: “The Bank of Mum and Dad is busier than ever, as parents are increasingly having to step in to provide loans and financial support to family members, especially to help first-time buyers with house purchases where they can’t otherwise get mortgages.
“In the past, it has been common for parents to gift capital to their children (often as a form of early inheritance). With the ongoing cost of living concerns, and the cost of borrowing increasing, we’re seeing a switch to parents acting as true lenders expecting the debt will be repaid, in some cases with interest. The Bank of Mum and Dad is becoming a true lender in the mortgage market.
“The need to protect the loan as an asset can be complicated by the family dynamic, but parents must consider not only how to protect their capital for the duration of the loan, but also other potential liabilities, such as the impact the loan may have on family businesses, inheritance tax, or what may occur in the event of a divorce (either the lending parents, or the borrowing child).
“There will be legal implications for individuals who loan to a family member or friend in relation to a property. Well-meaning individuals can fall foul of some very scary rules around Regulated Mortgage Contracts (RMC), leading to issues with enforceability in the courts as well as potential criminal offences under the Financial Services and Markets Act 2000 (FSMA).
“Parents, particularly those who may be self-employed or involved in running a business, who step in to provide loans to family need to be aware of the potential pitfalls, regulations, and penalties they could face. A fine from the Financial Conduct Authority (FCA) can have serious ramifications for directors and professionals.
“It is always best practice to involve a specialist legal firm to advise on the structure and protections for the loan at the inception of the idea, and loans involving family members are no exception.”
