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Deposit money from the bank of mum and dad

These days its quite common for parents to think about lending their son or daughter some money to use as a deposit so they can get mortgage to buy themselves a home. Often the son or daughter gets a good salary and so will be able to afford the mortgage repayments, however, for some reason they have been unable to save any of the deposit themselves.  Parents often want to know if they do gift or loan a deposit or money for the property would there be any issues that they should be concerned about?

Our advice to the parents is for them to decide whether they wish to gift or lend the money to their daughter or son in the first instance. If the latter is the case, the terms of the loan have to be agreed between all parties— such as when it should be repaid, whether the parents wish to charge interest and if the interest would be paid monthly, or rolled up and collected when the loan is repaid.

The son or daughter will need to disclose to their lender the source of their deposit and that it is a gift from their parents deposit.  Not all lenders are keen to proceed if the deposit is being provided by way of a third-party loan.

If the parents wanted to have a declaration of trust to protect their interest, that would have to be disclosed to the lender and the lender’s consent obtained.

If the son or daughter has a partner who will also be living in the property, it might be wise to arrange a cohabitation agreement.

Parents could have an interest in the legal title but then they would have to be a party to the mortgage and there may be tax implications, such as three per cent additional stamp duty if you already own a property.

There may also be a capital gains tax liability when the property is sold