Disputes over the true nature of funds from the 'Bank of Mum and Dad' could arise, a solicitor has warned, after research has found first time buyers have become increasingly reliant on financial support.
A quarter (24 per cent) of property buyers were “more reliant” on financial support from family and friends since the pandemic, according to a Legal & General survey.
But Jessica Jamieson, partner at Cripps Pemberton Greenish, warned of potential disagreements over whether these funds from parents or grandparents were intended as a gift, or a loan to be repaid.
Ms Jamieson said: “Those receiving it will argue it was only ever intended to be a gift, whilst those advancing the money might say it was always a loan and was to be repaid.”
The warning comes as 23 per cent of home purchases will be funded wholly or partly by the Bank of Mum and Dad (‘BoMaD’) this year, up from 19 per cent in 2019, according to research from Legal & General.
BoMaD support during pandemic
The survey by Legal & General also found that 15 per cent of ‘BoMaD lenders’ were planning to give more than they would have done before the pandemic, with 18 per cent wanting to give at least 50 per cent more.
Ellen Roome, chief executive and financial adviser at The Finance Roome, said parents were offering to step in to assist, amid the reduced number of lenders offering products above 85 per cent loan-to-value.
Ms Roome said: “We have achieved this either with parents borrowing on their own property to release a larger deposit for their children, or using their own savings to assist.
“Joint borrower sole proprietor options are also proving popular [...] for example [where] someone who is self-employed and has had their income affected by Covid can no longer demonstrate affordability on their own.”
Limited options for BoMaD
While Ms Jamieson warned of the potential disputes over the nature of BoMaD funds, Brian Donovan, partner and mortgage adviser at Ideal Mortgage Advisers, said: “There does not seem to be much awareness amongst the general public that a deposit can be loaned to a homebuyer to assist with the house purchase.
“This is not helped by the majority of lenders’ criteria in which they require the giftor to waive any interest in the lump sum.”
But Ms Jamieson also said that where lenders need to approve the funding given, this could prompt parents to describe funds as a ‘gift’ when in fact it was intended to be a loan.
However, Mr Donovan noted exceptions to a requirement for donors to waive any interest in a deposit.
He said: “[A] number of high street lenders will accept the loan from parents as repayable upon the sale of the property rather than being a true gift.
“This will limit the number of lenders they can go to but does offer the parents the protection of getting their money back.”
Mr Donovan also said that an alternative option, where a parent owns a share of the property to be purchased in order to protect their money, had been hampered by stamp duty rules.