Buying with parents' help

ic198

I am about to buy a flat with my parents' help. They have (very kindly!) offered me a loan to give me a 25% deposit. We are going to treat the loan as shared equity- they will own a 25% share in the flat.

My questions are: does this arrangement need to be formalised in any way? Should they become joint owners of the flat (in terms of legal paperwork?) or is there anything else that needs to be done in legal terms? I use the word needs because we simply want to do what is necessary to avoid problems in the future- as it is family if it isn't essential we won't bother.

Thanks in advance for your help

paint

ic198 wrote:

We are going to treat the loan as shared equity- they will own a 25% share in the flat.

If you are going to treat it as such then this must be formalised in the legal documents - speak to your solicitor asap. They need to be recognised as having an interest in the property.

ic198 wrote:

I use the word needs because we simply want to do what is necessary to avoid problems in the future- as it is family if it isn't essential we won't bother.

It is absolutely essential IMO that you formalise this, simply because you are family. Life is full of “what ifs”….

What if you get married and your partner moves into your home? Of course, what’s yours is theirs – how would your parents feel if this was the case? Would they feel uneasy that a third party potentially had a claim on an asset (your home) for which they'd contributed 25%?

If I was you, I'd speak to your solicitor with a view to formalising things asap so that once everything's signed and sealed you can all forget about it, safe in the knowledge that everybody (yourself and your parents) are protected whatever life throws at you.

ic198

Thanks for your reply paint, some very good advice. Can anyone give me some advice on how the situation could be formalised? I realise we could become joint owners with their names on the deeds as well, but I'm having to borrow a lot of money for my mortgage (5x salary, and yes I have read the thread about this and agree about it being madness- I'm planning on letting one of the rooms in the flat to make it affordable) and I don't think a mortgage company would lend me that sort of money if its presented as joint ownership rather than 25% deposit. Is there any other way my parents' share can be recognised?

jennifernil

If they were recognised as joint owners then would they not be liable for CGT on their share of any profit made at sale?

I have loaned our daughter the deposit for a flat, she is a student so we gaurantee, and pay, the mortgage. When the flat is sold I will get my money back. We drew up a simple loan agreement which we all signed and gave it to our solicitor to keep.

I suppose you could do something similar. However the mortgage lender might not like it if you were to be paying your parents some interest on this loan, and I suppose they could be liable for tax on any interest you paid them.As I do not work I am a non taxpayer, so this does not affect me.

hethmar

Its a difficult situation. We gave our son 10% deposit as a gift and we had to declare to his solicitor this was a gift, not loan and that we had no interest in the property. It may be more difficult to get a mortgage in the terms you are desciribing. Best to check with a broker.

You can let a room for up to £90 a week without paying any tax on the income - though you should, in theory declare you have a lodger to tax, local authority (increases council tax), your mortgage provider and your insurers.

Can you look at other forms of mortgage available to FTBs. Extending the payment period (some 40 year offers are available, which will reduce your outgoings for a while until you decide you can increase the payments?) or your parents could act as guarantors that you will be able to fulfil your obligations.

As already said, what may be a good relationship now CAN change.

dmg24

My parents did the same for me, on the same basis of shared equity. We did not formalise the agreement because it would have made getting a mortgage incredibly difficult (the mortgagor wants to know that if they were to repossess your property, that they don't have to consider the legal interests of anybody else).

Yes, it could get difficult if you were to fall out with your parents. It could also become difficult if a partner moved in with you. When considering this I looked at two questions:

Even if I did fall out with my parents, would I be that cruel as to deny them what is truly theirs?

Would I want to be with a partner who would try to cheat my parents out of something that is theirs?

They are extreme situations, but if you look at it in this way then you are covering all eventualities.

You also have to cover the other side of it, would you parents ever try to demand their money back? The way I looked at it is that I know my parents well enough to know that whatever happens, they would never do something like that.

I honestly think that in situations such as these you need to consider your individual relationship with your parents, and what would happen if that went wrong (and the likelihood of it going wrong!). I've been through rough times in the relationship with my parents, but even when things have been pretty horrid, there has never been any question of them demanding back their money, or of me denying them their share of the property.

Jay1b

Getting things formally done is great if you're buying with a mate or a girlfriend. But it is but hassle, and i'm sure your parents trust that you wont try screwing them over in x years when you sell the flat. Assuming thats the case, why create more hassle for yourself?

Keep it simple pretend its a non-returnable gift.

cupid_s

there is another situation which doesn't involve anyone 'being cruel' or screwing anyone over
something very similar to this happened to my dads cousin
his father gave him a lot of money for his house. He used this as equity to start up a business which then collapsed, and he lost his house and obviously his father lost all the money he'd put into the house.

If you got into financial trouble which we hope wont ever happen, then the flat could be taken and there's no way your parents could get anything

ioscorpio

You would draw up a tenant in common agreement rather than a joint owners agreement.

http://www.lawontheweb.co.uk/basics/cohabit.htm#Co-Ownership

dmg24

If you got into financial trouble which we hope wont ever happen, then the flat could be taken and there's no way your parents could get anything

That's a good point. The agreement that I have is that should the value of the property fall, then they will lose their proportion of the fall in value.

The issue of financial trouble is always there, but this would be a risk irrespective of how the agreement was set up. It is certainly a point to discuss with your parents, what they would expect if your house got repossessed or if you were having trouble with mortgage payments.

In no way am I passing judgment on the situation noted by cupid, but hopefully such an extreme could be avoided, or at least dealt with more clearly, if the son had been open about his plans in the first place?

Maybe the best way to sum up is to remember that the situation is an ongoing one, and that circumstances can change, both for the parents and/ or the child. My advice is just to make sure that all eventualities are covered for before the agreement is entered into. For instance, I know that the money that my parents have leant me is for their retirement, so they are likely to need it in ten years time.

The only thing that a legal agreement will bring about is the right to sue each other! It wouldn't even offer much protection against the property being repossessed, as the majority of mortgagors would insist on having a first charge on the property, and therefore the parents would only get whatever money was leftover.

Having studied Law at uni, I can see the benefits in formalising any financial agreement. However, as long as you are confident of your relationship with your parents, and you can agree on what would happen if x, y or z situations occurred, I would keep it informal.

There is always the possibility that in years to come your parents may let you keep the money ... we can always hope! x