The Bank of Mum and Dad – the ins and outs - Ludlow Lane Skip to content

The Bank of Mum and Dad – the ins and outs

According to a press release in 2020 by Legal & General, the Bank of Mom and Dad (or BoMaD) is one of the main ways first-time property buyers under the age of 35 are able to get themselves on the map – amounting to £18.11bn worth of property transactions.

Legal & General also discovered that this assistance was also extended to many aged 35 and over – an amount of £2.14bn being borrowed for this purpose.

And there is no doubt that these amounts have increased over the last 2 years with the pandemic.

Clearly this has been of immense benefit to many who would not have ordinarily been able to purchase a property.

Parents help by:

  • acting as a guarantor
  • providing cash for a deposit on a home
  • purchasing a property

When it comes to money transactions it is always a good idea to have things in writing, especially between family members, as these things can become unnecessarily complicated and painful if things aren’t made clear.

Gift or Loan

If the money is gifted, that is one thing. However, giving a gift with the implication that it is a loan to be repaid is another. It is best to state in writing what seems to be obvious, rather than leave things up to interpretation.

When drawing up a loan agreement we recommend including the following:

  • When the loan needs to be repaid
  • What happens if either party dies
  • The interest rate
  • Whether the loan can be repaid early or not
  • Plan of action if the recipient defaults on their mortgage

“Hard” or “Soft” Loan

In the family court, even once it has been established as a loan, the “hardness” or “softness” of the loan also comes into it. This can a be tricky to ascertain as there are many deciding factors.

It may be decided that the obligation is a ‘hard’ loan if:

  • It is to a finance company
  • The terms have the feel of a normal commercial arrangement
  • It arose out of a written document
  • There is a written demand for payment or threat of litigation
  • Enforcement was not delayed
  • It is an amount that the creditor is not likely to waive

On the other hand, the obligation may be treated as a ‘soft’ loan if:

  • It is with a friend or family member with whom the debtor remains on good terms
  • It arose informally, and the terms do not have the feel of a normal commercial arrangement
  • There has been no written demand for payment
  • Enforcement has been delayed
  • It is an amount that the creditor is likely to waive

Once again, whether loan or gift, it is highly recommended to have everything agreed upon in writing. Evidence of a loan shown by a “proof of deposit” is not enough and will most times be interpreted as a gift.

This is especially important in protecting family funds in the event of a child’s marriage being dissolved.

In a divorce

Deciding whether financial contributions are returned to the parents, retained by the person related to them or shared between the divorcing couple depends on the following:

  • How the financial assistance was provided
  • Whether any formal, legal agreement was drawn up
  • The spouse’s needs
  • Whether the money was gifted or inherited

However, the BoMaD can safeguard themselves.

One way is for a Declaration of Trust to be drawn up which names the parents and is in favour of the provider of the money, ensuring that the funds would be returned.

Also, if there are enough funds available for both divorcing parties’ needs to be met without using the money provided by the parents, the argument will be stronger for the funds to be “returned to sender”.

Whatever your situation may be, it is always recommended to seek legal advice to ensure protection of financial assistance to a child/grandchild when they are married.

Open chat
Get in touch with me through WhatsApp