In the current property market it is becoming increasingly difficult for first time buyers to get a toenail on the property ladder let alone a foot. Increasingly, young couples are having to borrow money from their parents and extended family in order to afford their first home.
While the age old concept of borrowing money from the bank of Mum and Dad is well known, less is known about the legal implications when using borrowed or gifted monies when purchasing a property. With the ongoing threat of deviant money launderers and fraudsters on every corner, banks and solicitors are having to employ far stricter and tighter regulations in order to protect themselves and their clients.
So, if your Mum or Dad are gifting you a lump sum towards your deposit and even if the funds are already in your bank account, be prepared for the solicitor carrying out your conveyancing to request not only proof of ID and source of funds from your parents, but also confirmation in writing that the monies are gifted with no obligation for repayment, they will also be advised to obtain independent legal advice. Banks require this information before they will be willing to lend. However, some banks have stricter rules and due to the risk may not accept deposits which have come from gifted monies, as they do not want to run the risk of these monies having to be repaid, limiting the amount of funds you have available for your monthly mortgage repayments.
If you are being loaned money from your parents i.e. they expect the money to be repaid then this has to be disclosed to a lender and secured by a charge most lenders are wary of this so do check before proceeding too far.
In the past Parents have taken a share in the property to protect the family money and this means they have an interest in the property and if they are already home owners, then the purchase will be subject to higher rates of stamp duty (an extra 3% on each band). In addition some parents who could not perhaps afford to loan or gift a lump sum may have previously assisted their children via a joint mortgage, to facilitate the purchase. With the changes in stamp duty rules, this option would also result in additional stamp duty.
So how much of an increase are we talking about? Under the new rules a purchase of a second home will incur an additional 3% so on a purchase price of £250,000 the higher rate of stamp duty would be £10,000 as opposed to just the £2,500 you would be expected to pay at the lower rate.
There may be a way around the problem by the parents being given a promissory note (which is not an interest in land) and subject to the lender agreeing it may be possible to register a restriction at the land registry or a unilateral notice this is not ideal as the protection is less but may be a possible solution.
If you are considering either a gift or a loan from your parents to help you with your purchase, firstly make sure you confirm this with your Lender, and if the monies are loaned and not gifted, factor in the additional stamp duty into your calculations – to avoid delays in the conveyancing procedure or having to pull out of the purchase all together.
Meggie Morgan is a solicitor based at Parfitt Cresswell in Fulham, London.
020 7381 8311 meggie.morgan@parfittcresswell.com
