Before borrowing from the Bank of Mum and Dad to get on the property ladder, there are things to consider
The housing ladder is a tough climb. While monthly loan payments can be cheaper than renting, finding enough cash for the deposit is difficult – many mortgage deals want 20% upfront.
Enter the Bank of Mum and Dad – BoMaD for short – where parents lend to help with that home purchase.
Insurer Legal & General calculates that BoMaD is worth around £5.8bn this year.
Most arrangements have no formal agreements, and that could be dangerous.
BoMaD money – often running into tens of thousands of pounds – can cause problems ranging from a failure to repay to disputes among siblings when one gets cash and others miss out.
Will Hale, of Key Retirement, which specialises in turning value in homes into lifetime loans via equity release, says: “Parents naturally want to help children and grandchildren, but it is desperately sad if that comes with emotional fallout on top of financial costs.” Key Retirement estimates one in four children found handouts from parents causing friction with other siblings, while one in five parents don’t tell children how much sisters and brothers have been given.
Most parents lend money – making gifts with no repayment is less common – based on need.
But what starts as an act of generosity and intergenerational help, can lead to family and legal bust-ups.
Will warns that parents and children need to be clear from the outset if handouts are loans or gifts.
With such large sums of money involved, it could be better to get independent advice first rather than risk a dispute which might end up in court.
Outright gifts where no repayment will be made have fewer potential problems than loans – other than perhaps causing jealousy and upset among other children.
Loans are more contentious, with greater possibilities of difficulties. Many of these are caused by relationship break-up – either the parents or the children – and a failure to repay.
One typical scenario is lending to a couple which then splits up.
Unless the paperwork is correct, there is a risk one partner will take the BoMaD money and never repay it. Another is where there are step-children – unravelling the results of re-marriages can be difficult and trying to be fair to all is never easy.
And if the parents break up, then the loan could form a feature in the divorce settlement.
Making a formal agreement when borrowing from relatives could save a lot of heartache
How much one sibling gets compared to another could cause disputes
Getting onto the property ladder is an expensive business