The Bank of Family and Friends and unmarried couples – what to consider

It’s increasingly common to see family and friends helping their loved ones get a foothold on the property ladder. This is often known as the Bank of Mum and Dad, or as we prefer to call it, the Bank of Family and Friends.

In fact, according to research by Savills, gifts or loans from the Bank of Family and Friends will total £25 billion between 2022 and 2024. Legal & General have been tracking the Bank of Family and Friends since 2016 and in this year’s survey it was revealed that families are set to support 47% of all homes purchased by buyers under the age of 55 this year.

The increase costs of property and rise of the cost of living are some of the reasons why more and more first-time buyers are depending on the help of the bank of family and friends.

In this blog, we’ll look into what needs to be considered when lending money to family members or friends for their first property, as well as the implications when unmarried couples split up.

What should the Bank of Family and Friends consider before lending money?

When thinking about lending money to, for example, your offspring for the purchase of their first home there’s a few things that you need to consider:

• Is it a gift or a loan?
• If it’s a loan, when and how do you expect to be repaid?
• Do you expect to own a share of the property and, if so, on what terms?
• Are you providing the money only to your family member or friend or to their partner too?
• What would you expect to happen to the money or your share of the property if your family member or friend were to split from their partner?
• What would you wish to happen if one of them dies?

To avoid any issues when a couple separates, it’s really important to ensure that any Bank of Family and Friends loan is clearly defined. There are three main options for how the money can be given:

• as a gift and the giver is not ever expecting it back;
• as a loan, repayable with or without interest depending on the specific agreement the lender offers; or
• as an agreement where the lender acquires an interest in the property. If this option is chosen, there will need to be a discussion about how much of the property they will acquire and how much influence they will have over the running of the house, for example regarding insurance.

Whichever option is chosen, it’s important that everyone understands exactly what is being agreed and that the arrangement is properly documented at the time the house is bought.  Alarmingly, the Legal & General survey also revealed that only a quarter of Bank of Family and Friends lenders sought advice before offering their financial support. 

Lending to unmarried couples can be a particular risk

Unmarried, cohabiting couples are the fastest growing type of family in the UK.  However, cohabitation law is often misunderstood and many couples (and their family and friends) are simply unaware of their rights – or lack of them. There is no such thing as common law marriage and cohabiting couples are not treated the same as divorcing couples when they separate. This has particular consequences for the Bank of Family and Friends.

What happens to their home when unmarried couples break up?

The legal rules governing the distribution of property after the breakdown of a relationship are very different for married and unmarried couples. For unmarried couples, it’s possible that, following the breakdown of their relationship, a partner who despite contributing significantly more than the other in terms of a deposit or mortgage payments may be forced to hand over 50 per cent of the property to the other partner depending on how they own it.

What can you do to ensure the Bank of Family and Friends investment is protected?

Because of how the law treats cohabiting couples, there is always a risk that if, for example, your child moves in with a partner, their partner may have a claim over the funds you have provided to your child. Any money that you have contributed towards the purchase of your child’s property is at risk unless it is properly protected.

Firstly, look at the different ways the property can be owned, the different ways you can give or lend the money and take good legal and financial advice.

Will you be lending the money or making a gift? Who are you making the loan or gift to? For example, if your child is buying a property with their partner, are you lending the money or making the gift to both of them or just to your child?

The most common property ownership structure is as joint tenants. Under joint tenancy rules, the co-owners own the property in equal shares – no matter that one may have made a far greater financial contribution to its purchase. When the property is sold, the sale proceeds of the property will also be divided regardless of how much each owner financially contributed. Finally, if one of the owners were to die, the property would automatically pass to the other even if the deceased’s Will said otherwise.  This is called the right of survivorship.

The alternative way to own a property jointly is as tenants in common where each co-owner owns a specific share of the property. This can either be half, or a defined percentage which reflects a greater financial contribution to the purchase price. When the property is sold, each owner receives a share of the proceeds in line with how much of the property they own. Also, when a co-owner dies, there is no right of survivorship.  Their share of the property passes in accordance with their Will or, if they don’t have a Will, the intestacy rules. 

A declaration of trust is a legal document which is used to set out the shares that each owner has in a property if they are owing it as tenants in common. If, as the Bank of Family and Friends lender, you have contributed a significant sum towards the purchase of a property, this document can express your contribution as a percentage share of the equity – either you could be a co-owner or, for example, your child could have a bigger share of the property because of your financial contribution. When the property is sold, the proceeds will be divided in the percentages set out in the declaration of trust.

Are there any other options?

Another option to consider is entering a cohabitation agreement. Unlike prenuptial agreements, cohabitation agreements are legally binding and can provide certainty when a relationship breaks down. They are beginning to become more common amongst cohabiting couples. The agreement can set out the ownership of a house, what each person’s financial responsibilities will be towards the other and how savings and jointly owned assets will be divided if the couple separate.

Using a cohabitation agreement either before or whilst a couple is living together helps:

• everyone have a clear understanding of what the financial commitments are
• avoid any misunderstandings especially over who owns what
• avoid difficulties and disagreements if the relationship ends
• provide clear evidence of everyone’s intentions should any dispute have to go to court

Cohabitation agreements can also help protect Bank of Family and Friends lenders because they can set out the financial contributions towards the purchase of a property, where those contributions have come from and clarify what the intentions are around property ownership and what will happen on separation. 

For example, if the house is owned by your child in their sole name and you have helped them buy that property, if their partner then moves in, the cohabitation agreement could set out that the partner doesn’t get a share in the property no matter that they pay the household bills or fund some renovation works. 

If you are thinking about lending money to a relative or friend to help them buy a property, it is vital to take both legal and financial advice so that you can ensure your investment is protected in the best way possible.

Our cohabitation lawyers can help guide you through the different options and can work with your financial advisor to find the best solution. Talk to our team to find out more.