Jersey Property Law and considerations for loaning or gifting money to your children
The Bank of Mum & Dad
With the average cost of buying a three bedroom house in Jersey heading towards £600,000 an advance from the so-called “Bank of Mum and Dad” is increasingly the only way that millennials can afford to get a foot on the property ladder.
Philip Syvret, head of the Property Team at Benest & Syvret has seen a dramatic increase in the number of parents helping their children with their first property purchase. Drawing on that experience he has prepared the following guide to help those parents through the various pitfalls involved.
Can You Afford It?
There is a natural instinct to want to help your children to move onto the property ladder and to potentially avoid a lifetime of renting. Clearly however, the first question is whether you can afford to make a loan. Parents who are in the fortunate position of having cash or savings need to consider whether those savings should be reserved for their own needs in life. Whilst the costs of future residential and medical care have now been mitigated to a certain extent by the Long-Term Care Plan (“LTC Plan”) implemented by the States of Jersey, careful advice should be taken to ensure that any gift or advance to children would not be seen as a dissipation of assets to avoid any contribution that might be required in the future pursuant to the LTC Plan.
If you are considering a re-mortgage or an equity release on your own home in order to advance monies to your children, remember that your own home will be at risk if repayments are not made. You will in effect become the bank to your own children and will need to assess their ability to make repayments if that is the structure that is intended.
Is Your Parent/Child Bond Strong Enough?
An often unforeseen consequence is the impact that a financial obligation can have on the relationship between children and parents. If parents make a loan children may feel under pressure to behave in a certain way to demonstrate they are being financially responsible. If a financial relationship causes parents to focus on every penny their son or daughter is spending then that can be disadvantageous.
Gift or Loan?
There is a dilemma when considering whether to make an outright gift of funds or to advance a loan to be repaid.
If it is to be a loan you will need to agree a trigger for the re-payment. Would that simply be on the parents’ request for repayment or would it only be on the future sale of the property? Alternatively, are lump sum repayments to be made from time to time during the loan term. If so, again like a commercial banker, parents will need to consider whether their son or daughter can afford those repayments.
The biggest problem usually arises if the monies are being advanced to fund a deposit for a house purchase, with the balance being taken by way of a mortgage from a commercial lender. Invariably, the commercial lender will require confirmation that a house purchaser has no other hidden debts or loans which are to be repaid. Creating a formal loan with Mum and Dad can therefore upset some proposed mortgage arrangements. Careful advice needs to be taken during the mortgage application process to ensure that any advance from Mum and Dad is correctly recorded so as not to cause difficulty with the bank.
When making a loan or gift parents also need to consider future life events. Would a divorce between the parents require an immediate repayment of the advance so that the parents could rehouse themselves? In turn what would happen in the event of the child to whom the loan has been made marrying and subsequently divorcing themselves? Would that mean that the monies advanced are part of the matrimonial assets to be divided up? Careful consideration needs to be given to these aspects so that there is an understanding and written protections in place.
Equally, consideration needs to be given to what would happen in the event of death of the parents or children. For example, it might be appropriate if an advance is being made to one of your children but not the other, to make adjustments in your Will so as to ensure that your Estate is fairly distributed, acknowledging that a gift that has been made during the lifetime to the other sibling. Equally, the Will could make provision for the writing off of a loan if the advance has been structured in that way.
Provision should also be made in the unlikely event that the child predeceases the parent. At the time of the loan and the house purchase it would be appropriate for Wills for all parties to be made accommodating the arrangements for the advance to ensure that all parties are protected.
As an alternative to an outright gift or a loan it might be appropriate for there to be a two-generation purchase of a property. In that way the parents could take an ownership stake in the house. That would give a great measure of control, but in turn may not be seen by the children as allowing them to live independently and have direct ownership of their own home. Equally, it might mean that the parents will need to become involved in any related mortgage lending with joint liabilities for the repayment of the mortgage so far as the bank is concerned. Careful advise would be needed to make sure that all parties understood their respective positions.
An alternative would be to prepare an Equity Agreement between the children and parents. This would allow the parents to require a sale of the house or for them to be repaid the amount lent with a suitable uplift in proportion to any increase in value of the property. That would give similar (but somewhat diluted) protections as with the ownership of a share in the property. Again however, any underlying mortgage lender may object to a parent having a formally documented interest in the property. Advice would need to be taken at the mortgage application stage to ensure arrangements were workable.
Guarantor of Mortgages
As an alternative to a gift or advance of funds the Bank of Mum and Dad could potentially assist with a guarantor mortgage. In this way parents become liable for mortgage repayments in the event of default by their children. There are an increasing number of financial institutions who are willing to consider these arrangements. Again, careful independent advice would be required so that all parties understood their potential liabilities. Discussion with an experienced mortgage advisor will lead you to loan institutions willing to consider a guarantee arrangement.
Shared Equity and Other Schemes
The Government has acknowledged the difficulties that individuals have in raising deposits and that not everybody has a Mum and Dad who are immediately able to advance funds. There are a number of shared equity schemes in the Island. In these schemes the original vendor, generally a Housing Trust, retains a share in the ownership of the property, thus reducing the overall price on the initial acquisition. The disadvantage is that the buyer does not have the benefit of the growth and equity of the full value of the property. There is the risk that they will never be able to move up the ladder to a larger property because the equity that they have built up is distributed between different owners. It does however, provide to some the most realistic route to property ownership.
Some developers are now allowing first time buyers to save their deposit by way of monthly contributions. In the Horizon project on the Waterfront buyers can pay the deposit by equal monthly instalments during the two-year build phase so that by the time the properties are built, a ten percent deposit is already paid and the purchaser can then look to a ninety percent mortgage from a commercial lender. Parents can acts as guarantors to the monthly deposit payments without liability to pay the full balance for the purchase of the property in due course. It is anticipated that similar schemes will develop in the Island in due course.
Jersey property law is in many ways different from that which applies in the UK. It is vital therefore to seek clear independent advice from an experienced lawyer. Philip Syvret and his property team at Benest & Syvret have decades of experience and will be well-placed to assist you.