First home buyers and family loans
The challenges for first home buyers in a property market that has experienced strong price growth, as ours has in recent years, have been well publicised. One of the interesting responses to these challenges has been the increase in the number of home buyers who have been entering the world of home ownership with varying levels of financial support from their parents. In fact, this has become such a common option that many readers will these family loans as ‘The Bank of Mum and Dad’.
Family loans of this nature have made a huge difference for many first home buyers as they attempt to deal with rising prices and stiff competition from other buyers. Not only does a cash injection help young buyers raise a suitable deposit with which to purchase a home, but it can also make a real impact in helping many buyers to avoid the requirement for expensive Lenders Mortgage Insurance.
However, there have been several stories in the media recently which show that there is a potential downside when people start utilising family loans.
For example, last month we saw some news reports of parents having to sue their children over financial assistance they provided for a home purchase, with disagreements arising over whether those funds were provided as ‘a gift’ or ‘a loan’.
In fact, our understanding is that over the past two months alone, judges in the County Court have handed down at least two judgements in favour of parents in cases where they provided family loans to assist first home buyers in a property purchase.
The word from members of the legal community is that it is becoming more common for parents with the very best of intentions to find themselves in complicated legal disputes with family members after disagreements over the role of ‘The Bank of Mum and Dad’.
As we all know, family relationships change over time. That’s why it is important to document exactly what the arrangements are whenever a loan is provided to relatives. Everyone needs to be very clear exactly how much is being provided, when it needs to be repaid, and what the agreement is whenever the property is sold. Parents also need to be aware that these arrangements become particularly complicated if you are lending to one of your children and their spouse, as these relationships can also change over time!
Remember, if you have any questions about the local property market or what is happening to real estate values in your area, we are always happy to assist. You can call the team at Barry Plant Preston at any time.
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