High cost-of-living attributed to rise in the need for the Bank of Mum and Dad
The tough economic climate has seen the so-called Bank of Mum and Dad increase its stake in the UK’s mortgage market to help children onto the property ladder, according to data from law firrm Bishop & Sewell LLP.
With the high cost-of-living continuing to bite, the Bank of Mum and Dad is estimated to provide around £17 billion through informal gifts and loans each year.
Additionally, the research shows that the Bank of Mum and Dad is involved in an estimated 50% of housing transactions for those under 55 years of age.
Charlie Davidson (pictured), senior associate in Bishop & Sewell’s residential property team, said the Bank of Mum and Dad was busier than ever, as parents were increasingly having to step in to provide loans and financial support to family members, especially to first-time buyers.
“In the past, it has been common for parents to gift capital to their children, often as a form of early inheritance; however with the ongoing cost-of-living concerns, and the cost of borrowing increasing, we are seeing a switch to parents acting as true lenders expecting the debt will be repaid, in some cases with interest,” he said.
The need to protect the loan as an asset, Davidson said, could be overly complicated by the family dynamic.
Davidson said parents must consider not only how to protect their capital for the duration of the loan, but also other potential liabilities, such as the impact the loan may have on family businesses, inheritance tax, or what may occur in the event of a divorce.
“There will also be legal implications for individuals who loan to a family member or friend in relation to a property,” Davidson said. “Well-meaning individuals can fall foul of some very scary rules around Regulated Mortgage Contracts (RMC), leading to issues with enforceability in the courts as well as potential criminal offences under the Financial Services and Markets Act 2000 (FSMA).
“Parents, particularly those who may be self-employed or involved in running a business, who step in to provide loans to family, need to be aware of the potential pitfalls, regulations, and penalties they could face.
“A fine from the Financial Conduct Authority (FCA) can have serious ramifications for directors and professionals.
“It is always best practice to involve a specialist legal firm to advise on the structure and protections for the loan at the inception of the idea, and loans involving family members are no exception.”
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