The Family Fund: Bank of Mum & Dad 2.0

With it becoming increasingly difficult for young people to get on the property ladder due to high interest rates, lack of affordable housing, and the need to find a significant deposit, it is unsurprising that parents are being asked to help their children buy their first home. This has been a long-standing practice in Hong Kong and in the UK.  

It can also be difficult to obtain a mortgage when moving to a different country where there is no credit rating, residency or employment history. This may be the case with couples who have lived abroad for many years and seek to go back to their home country later in life.

Recently published figures in the UK have shown that over 318,000 homes were purchased with financial support from family members this year alone, with the average financial support coming in at £25,600.

However, it is not just stopping with the bank of mum and dad. Grandparents and more affluent older siblings are also now being 'recruited to the cause' and to help provide deposits. 

Making such gifts can place significant financial stress on older family members, particularly if they have to withdraw equity from their own homes to pass on to their children, or rely on savings which were intended for their retirement. As home ownership has declined through the generations, fewer parents are in a financial position to assist, hence the call for help from siblings.

What can easily be forgotten however is what happens to those funds in the event the family member to whom the gift was made subsequently divorces from their husband or wife. If the funds went into a property which subsequently became a family home, and the marriage lasted many years, at least half of those funds may be lost in the divorce. 

Where significant funds have been provided, it is sensible to consider a prenuptial or post-nuptial agreement to ensure that in the unfortunate event of a divorce, the family funds provided to buy the home are not divided with the other spouse. 

Alternatively, other structures should be considered, such as the parents or sibling taking a legal and/or beneficial interest in the property equivalent to the funds advanced, or the money simply being loaned, rather than gifted, with a clear loan agreement in place. 

It is important to have proper documentary evidence, and a clear paper trail to show the source of funding, to avoid any allegations that the loan was a 'soft loan' which would not be enforced.