It has become fairly common these days for parents to assist their children to purchase a home.
There are many aspects to be cautious about in this regard:-
1. Parents advancing money to their children should be specific whether the advance is a gift or a loan.
A gift is made without expecting anything in return and a loan requires repayment, usually with interest.
In the recent Court of Appeal decision of Chaudhary v Chaudhary the Court had to consider whether an advance was a gift or a loan in Family Court proceedings (divorce) between a young couple who benefitted from an advance by the parents of one of the parties to the marriage. Obviously a gift would entitle both parties in the Family Court proceedings to benefit from the gift and if the advance was considered a loan both parties, to an extent, would be responsible for the repayment of such loan.
Not clearly specifying and documenting whether an advance is a gift or a loan may have far reaching financial consequences for families.
2. The other way in which parents are providing assistance to their children to enable them to purchase a home, is by guaranteeing the children’s loan from the bank.
A guarantee usually entails the guarantor providing their property as security for the children’s loan.
The risks associated with this are:-
(a) If the children default on their repayments, the bank may require the guarantor to make the repayments. If the guarantor cannot make the repayments then the bank may sell the guarantor’s property to recoup the advanced loan amount plus interest and legal costs.
(b) The guarantor will not be able to sell their property on their terms. If the guarantor wants to sell their property they will have to do so by considering the mortgagee’s requirements. Sometimes the mortgagee requires a lump sum payment from the sale proceeds or sometimes the mortgagee requires further security in the form of another property or a cash deposit paid into an investment account held by the mortgagee.
(c) Many times, children are led to believe that they may be able to refinance their loan with the mortgagee within a certain period of time and by doing so release the guarantor from the guarantee. There is seldom, if ever, a guarantee that the mortgagee will release the guarantor from the loan regardless of how well the children’s financial position has improved or how much the property’s value has increased.
3. Consider any advance that may have been made in your Will as such an advance may benefit one particular beneficiary of the Will more than others where the intention may have been for the beneficiaries to benefit equally.
It is always wise to seek legal advice when a parent wishes to assist their children in advancing funds to their children. This also applies to scenarios other than purchasing homes.