Help your children but protect the investment!

Despite the current property woes, an inexorable rise in house prices over the last twenty years or so has good and bad effects for all of us.  One of the good effects is the ability of people to accumulate tax free capital for themselves and their family.   Elderly couples then often release this capital in their latter years by “trading down” or even contracting into one of the increasingly popular equity release schemes on the market.  So many older people in our society see the benefit of previous house price rises. At the other end of the scale first time buyers particularly in the cities where prices are high are finding it more and more difficult to get into the house market at all.  To help youngsters into the market many parents and grandparents are putting up deposits sometimes of substantial sums and guaranteeing mortgages to help their children or grandchildren into the market for the first time.  This is a great help for the youngsters, giving them the opportunity to own a first home. However many parents or grandparents who put up the money are not themselves wealthy, they may have remortgaged their own property to get the funds, and may even be in the position where they may need the funds themselves at a later date.  In these situations it is not enough to rely on the youngsters word ‘I’ll pay you back when I’m better off”.  Yet many families do rely on such promises – sometimes with disastrous consequences. The simple fact is that if the house is in the youngsters name alone the deposit is at risk to other creditors if the youngster runs into difficulties with debt.  Someone may fall ill, lose his or her job, have no redundancy insurance, a few credit card debts and before you know it the house is repossessed and the deposit grabbed by creditors.  The promise of repayment is a bit hollow in these circumstances. Yet all this can be avoided by some sensible legal steps being taken within the family at the time of purchase.  Let’s imagine Mr A lends his granddaughter child B £25,000 on a house purchase of £100,000.  A simple contract between A and B can be drawn up, where on any future sale Mr A gets his £25,000 back plus a quarter of the increase in price.  If the house sells for say £140,000 in a few years grandfather A would get back (approx not counting fees etc) £10,000 being his share of the gain plus his original £25,000 = £35,000.  Granddaughter B would still have released to her £35,000 towards her next purchase. Moreover that contract can be backed up by a Standard security or mortgage deed over the property ensuring that in the event of any forced sale by granddaughter B’s creditors grandfather A gets his money back first, before any other creditor other than the daughter’s mortgage company. These contracts and securities can have lots of other issues dealt with if the parties want such as payment of interest.  Fees are relatively modest for the peace of mind which such arrangements can give.  The principles are clear.  We encourage families to take a commercial view of their arrangements and to put in place these protections where monies are changing hands but parents and grandparents want a little protection. Should the reader wish to investigate these plans please contact Graham Irvine or Carmen McIver on 01506 815900.