Historically, buyers involved in purchasing a property would finance the same with a deposit from their own savings and a mortgage supplied by a lender who were traditional banks and/or building societies.
In recent years a more common feature is when purchasers are given financial assistance by their parents and/or other family members due to the comparatively high prices of properties and the difficulty of having sufficient savings to be able to offer a deposit of 10% of the purchase price on exchange of contracts. This is colloquially referred to as the “Bank of Mum and Dad”. It is now common place for purchasers to receive financial assistance from family members and now the main lending institutions are aware of this and have adapted and changed their criteria for providing mortgage finance to prospective purchasers.
Lenders will want to know if any additional financial assistance being provided to the purchasers is a gift. This is distinct from the funds which the buyers may have provided from their own savings. It should be noted that if financial assistance is given to a person to purchase a property, then if it is not suitably clarified a potential interest in the property can be created in favour of the party who was given money or valuable consideration towards the purchase price.
This places additional obligations on the purchaser’s solicitors who will have to confirm with the person or parties providing financial assistance that the money is a pure gift and there is no intention by the purchaser(s) to pay back the money; and that no consideration has been given. They must confirm that the person or parties giving the financial assistance do not require any protection by a formal interest being registered against the title to the property on completion.
The verification of the financial assistance from “Mum and Dad” would normally take the form of written confirmation that the money being provided towards the purchase price is a pure gift of which they do not require repayment, and they do not intend to acquire an interest in the property upon completion. This confirmation is normally straightforward to obtain. The additional requirements with which the buyer’s solicitors have to comply are money laundering regulations in relation to receiving funds from third parties. This would normally entail the receipt of photographic and correspondence ID from the giftors as well as bank statement(s) showing the source of the funds/monies to be used towards the purchase, lying in a designated bank account.
An additional complication may arise if the giftors’ wish to protect their financial assistance by creating a legal charge/mortgage which will be registered against the property with an accompanying restriction on the title on completion. If the giftors’ require their financial contribution to be protected in this way it will require the consent of the lender for any mortgage loan.
There is no general guidance or consensus between the lenders as to their approach to this scenario as each one is dealt with on an individual basis. If the lender agrees then effectively there will be a second legal charge on the title of the property. The giftors may have to be separately represented as they would need to be advised that on completion the primary mortgage will have first priority on the register of the title, and their legal charge would be second in ranking in priority behind the lender.
This could have the ultimate consequence, if the borrowers fell behind with payments on the mortgage, that the lender exercise their legal right to obtain possession of the property and to sell the same to recover their outstanding mortgage debt. There may not be sufficient proceeds from the sale of the property to cover the main mortgage debt as well as the amount owing under the legal charge/mortgage from “Mum and Dad”.
These are considerations upon which potential purchasers of property would have to be adequately advised in order to protect their position as buyers; and also for the buyers’ solicitor to discharge their obligations in also acting for the lender.
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We can help you with buying and selling houses and flats, as well as other related residential property matters. Martin Reynolds advises on a broad range of property and commercial matters including business sales and acquisitions, commercial property and high value residential transactions. If you would like to arrange a meeting with Martin in our Reading Berkshire office, please email Martin at [email protected] or call us on 0118 958 9711 so that an appointment can be made.