In light of the current housing crisis, and the high interest rates of high street lenders, more and more young people are turning to the “Bank of Mum and Dad” (or other wealthy family members) to help with their first property purchase. And as the average age to purchase a property is now 33 years old, more and more parents are forthcoming with financial support so their offspring can finally ‘fly the nest’!
That is all well and good for the young person/ borrower, but what protection is available for the parent/ family member (turned lender) involved?
Several issues can arise if you simply lend money on an informal basis to assist with a property purchase:
- Lack of control
You will have no control or interest in that property and have no say in what happens with the property, including any future sale or re-mortgage.
- Regulated Lending
You could stray into the realm of regulated lending and depending on the terms of the loan, it could be unlawful, unenforceable, and carry financial penalties for breaching the Financial Services and Markets Act 2000.
- Tax
You could face adverse tax implications that do not align with your tax planning.
- Bankruptcy and divorce
You could lose your money if the borrower goes bankrupt or gets divorced.
Solutions:
Therefore, if you do intend to lend money towards your family member’s purchase, it would be wise to protect yourself with a loan agreement and legal charge. This is especially important if the borrower proposes to purchase the property jointly with a partner.
Usually, you have to be regulated by the Financial Conduct Authority to lend money to private individuals. However, we can advise you and draft a “friends and family” loan agreement in line with the Financial Services and Markets Act 2000, so you avoid issues with illegality, enforceability, and/or financial penalties.
Aside from the issues with regulated lending and tax, the loan agreement and legal charge can help protect your money. We can implement protection measures so you can control what happens with the property, similar to that of a high street lender. This can give you peace of mind and you can still help your family member get on the housing ladder.
If you are looking to assist a family member with their purchase and would like to protect yourself please get in touch.
To speak with Emma-Rose or another member of the Commercial Property team, please call 01483 887766, email info@hartbrown.co.uk or start a live chat today.
*This is not legal advice; it is intended to provide information of general interest about current legal issues.
