The potential pitfalls of parents’ kindness by helping children into their first home

Relationships (Family)

The current housing market and the difficulties for first home buyers are well publicised. It is common for parents to want to help their children into their first home. It is vital parents and children fully understand what they are getting into to save encountering issues later on, especially if the child is already in, or enters into a relationship after the property is purchased.

It is common for us to be approached by parents who want to help financially towards the deposit. They can do this in a number of ways but two common ways are either by way of a gift or by a loan.

Setting aside where you might stand in relation to a bank, there are potential issues if your child is in a relationship at the time, or even if they get into one after the property has been purchased. This means you need to think carefully about how your generosity is structured. The last thing you might want is for the partner to benefit from your input should they separate.

By way of a brief explanation, if your funds are used to contribute to the purchase of a home that your child and partner live in, either at the time of purchase or in the future, then it becomes the family home and they are entitled to share in it equally. If there is a bank loan in place then the loan is registered against the property and is taken into account before the equity is calculated. It doesn’t matter whose name the house is in, or whose name the mortgage is in, it is a cost of acquiring the relationship asset.

If you have made a gift to your child to assist in the purchase it cannot be claimed as a cost of the purchase. There was no intention of it being paid back and on any subsequent separation it has been lost.

If a proper loan document is prepared clearly stating that it is an “on demand” loan for the purpose of purchasing the property there can be no argument later that it needs to also be taken into account in assessing the equity in the property. Ideally a mortgage or caveat should be registered but the bank may very well have issues with a further mortgage being registered. Regardless, if your child later separates your loan can be called up. If your child is already in a relationship when the house is bought and the funds advanced, the loan can be in both your child and their partner’s name. If the relationship starts after the house is bought the loan is still a valid debt.

While we would always encourage couples to consider an agreement under the Property (Relationships) Act they can be difficult for clients to discuss. These agreements cannot be forced onto a party. Having your advance recorded as a loan does at least ensure this family sourced money is protected.

If you would like any further advice related to this or any other relationship or property matters, please don’t hesitate to get in contact with our relationships team or our residential property experts.

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