Many parents help their children to ‘get a foot on the ladder’ by assisting them with the purchase of their first property, but there can be drawbacks to doing this, as the Law Society has recently warned.
The first issue is how the assistance is to be given. Normally, the parents will buy a share in the property or advance a loan. In the case of a loan, it is normal that where there is a mortgage lender, that lender will have a first legal charge on the property. The mortgage agreement may have a clause prohibiting a second charge being put on the property. However, if you lend money without any security, it is important to understand that in the event of your child getting into financial difficulties, you will rank alongside their other creditors in the queue for payment. You will normally be entitled only to be repaid the amount you have lent, unless your agreement specifies some other arrangement.
Should you act as guarantor for the mortgage, this will mean that in the event that the property is repossessed, you will be responsible for paying the lender in accordance with your guarantee – normally the shortfall between the amount of the mortgage outstanding and the amount realised for the property.
An alternative is to use your money to buy a share in the property. This has several implications, among them being that if the property is subsequently sold, you may make a gain for Capital Gains Tax (CGT) purposes or crystallise a CGT loss that you would prefer not to crystallise, but short of provoking ill will within the family, there may be little you can do about it.
One other issue which is always important is what the position might be if your relationship with your child deteriorates or your child breaks up with his or her partner.
It is vital when considering such steps for all the interested parties to take legal advice.