Mortgage deposit provided by bank of mum and dad

Although I work in the mortgage industry and was aware of this, I was reminded of it when I provided support to one of my children when they purchased their first home.

Providing a deposit

Depending on the circumstances, the bank of mum and dad may be providing some cash to help out their child or their child and partner, wife, husband, whatever the scenario.

It may seem clear.  Here is £20,000, either a gift, never to be repaid, repaid whenever or a loan with repayments.  

Parents protect their children, I know I do.  So when I was providing a deposit to my son and his wife, I wanted to be sure if anything went wrong I wasn't losing half of my hard-earned money to my son's wife.  That is not a slight on her in any way.  But if something did go wrong and it happened quite quickly, I am not going to be overly happy that half of that money is lost to someone I will likely never see again.

Unfortunately though, lenders only want it to be a gift never to be repaid.

Why do lenders want it to be a non-repayable gift?

A lender in my case is lending money to my son and wife to purchase a home.  Now I come along paying the deposit for the property.  So here is the issue.  The lender does not want me to have an interest in the property in return for my money.

Say they purchase a property at £200,000 and I provide a £20,000 deposit.  At some point due to a breakdown in their marriage.  I could try and claim my £20,000 back.  A court could recognise that my £20,000 represents an equitable interest in the property. 

By having that interest I get my £20,000 back before the lender gets anything.  Depending on the value of the property when that happens it could mean the lender loses money as it can't be sold for enough to pay both me and them.

To avoid this, lenders and this happened to me for my son's mortgage, may require that I provide a signed gifting letter.  It clearly states I am gifting £20,000 to my son and I do not expect it to be repaid at any time.

That way should anything go wrong it will be difficult to convince a court I intended to have the money returned at some point.

How can you protect your position?

There are options, but they can be costly or more effort than you want depending on why you want the protection.

One option is a deed of trust.  This is an agreement you get your money back if the property is ever sold.  A lender is okay with that as this agreement would rank behind the lender.  So they get whatever they are owed first and if there is enough left or if not but there is some there, then it all goes to mum and dad.

Another option is to have a legal charge over the property, it would also rank behind the mortgage lender but ensure like the deed you either get all your money back if it's available or whatever is left after the lender is repaid.

Now you may think, if you sign a letter to the lender saying you don't want the money back and then take out a charge to say you want the money back is that a bit devious, underhanded, fraud even?

Yes, the lender wants protection to prevent you from being able to get your money back before they do.  The gifting letter ensures that they can use it should you try.  Using a deed of trust or charge is not a threat to the lender but you shouldn't tell the lender you are gifting the money but not really.

If you agree with the lender it's not a gift but that you are for example taking out a 2nd charge behind their first charge on the property they will be fine with that.  Well, I have not seen an instance where it has not been acceptable.

Providing a loan

You can set the deposit funds up as a loan.  That loan could be interest-free and only repayable on the sale of the property after the lender is repaid.  Lenders are generally ok with that as well.

Where it could be an issue is if you agree with your child that the loan is to be repaid, say at £200 per month.  The lender will then treat that as a commitment and add it to the affordability calculations, which could break affordability and the mortgage offer be withdrawn.  So care is required.  

Always discuss with the lender or if you do want to protect your contribution, speak to a suitably qualified professional before approaching a lender to save time later.