Mortgages  

Bank of Mum and Dad increasingly demands pre-nups

Bank of Mum and Dad increasingly demands pre-nups

More parents are “wading into the financial details of their children’s marriage” according to industry experts, while others turn to equity release products as they seek to help their children onto the property ladder. 

Caroline Holley, a partner at law firm Farrer & Co, said parents helping their children financially was a well-worn tradition, but it has become increasingly common in recent years with more parents putting greater thought and preparation into such support and how it can be protected down the line. 

“Increasingly, we’re seeing parents raising concerns about how to protect funds provided to children, often to help them get on the property ladder, and this has led to more structured methods of releasing funds from the Bank of Mum and Dad,” Holley said.

She explained many parents now encourage their child to sign a prenuptial agreement before saying “I do” or, instead of providing an outright gift, which would be a liability in the event of a divorce, opt to enter into a loan agreement.

“As family homes are usually considered matrimonial assets in the event of divorce, parents are increasingly assisting with the purchase of other assets, such as investment property, to try and ensure these assets are ring fenced and protected in the case of divorce,” she said.

However, Holley warned that the English courts can still make an order contrary to the terms of a prenup, if fairness dictates it is necessary.

“If one party is going to be left without a roof over their head, then any attempts to ringfence and protect assets is likely to be trumped by the requirement to meet those needs as a priority,” Holley said. 

At the same time, some lenders are seeing an increase in the popularity of equity release products as parents seek to support their children as first time buyers, giving them a financial boost while they are still alive rather than through inheritance. 

Equity release

Canada Life’s head of marketing for insurance Alice Watson said that gifting accounted for 15 per cent of equity release completions in H1 of 2022 in the firm. 

Watson explained that the trend for gifting is likely to grow, stating that it is “essential that advisers fully explain the lifelong nature of equity release and make sure interested customers understand the ins and outs of the product before purchasing". 

Noting the same trend, Rest Less Mortgages chief executive Stuart Lewis said that while the bank of Mum and Dad has typically been funded by savings or excess income, two macro drivers have piqued interest in equity release for parents of young adults over the last few years.

“Firstly, from an emotional perspective the pandemic has made people reflect on what they want from life. People see their kids struggling to get on the property ladder and how hard the pandemic has been for many of them, so they are looking for ways to transfer wealth while they are still young enough to benefit from it.