Buying a House Jointly with Parents
Buying a house jointly with parents' help can take place in various ways and needs to be carefully thought through. You should consider:
- Do your parents have an interest in the property? If they do, and they own another property, then the purchase will attract second home stamp duty at 5% and you'll sacrifice your first-time buyer relief. You can draft a Deed of Trust to confirm the interest split between the owners.
- Do your parents want the money back? Instead of having an interest in the property, your parents could provide an unsecured loan.
- Do you just need their names on the mortgage? Shared mortgages with parents, such as a Joint Borrower Sole Proprietor allow your parents to be on the mortgage, but not named on the legal title and with no beneficial interest.
Protecting your investment - the importance of a Deed of Trust
When buying a property with your parents, it's essential to understand the difference between legal ownership and beneficial ownership.
Legal ownership refers to who is named on the title deeds, while beneficial ownership refers to who actually has a financial stake in the property.
Even if everyone is on the title, their beneficial shares might be different, especially if contributions to the purchase price, mortgage payments, or renovations are unequal.
A Deed of Trust is a legally binding document that sets out the beneficial ownership shares of each party. It's vital, especially in multi-generational purchases, to have a well-drafted Deed of Trust. This document should specify:
- The percentage of ownership each party holds.
- How contributions to the purchase price are being handled (loan vs. gift).
- How mortgage payments will be divided.
- How decisions about repairs, maintenance, and improvements will be made.
- What happens if one party wants to sell their share.
- How the proceeds of a sale will be distributed.
Protect your interest in a property and confirm how to sell. Drafted by a solicitor. The first draft is within 1 to 2 working days - often within hours of instruction.
The deed includes:
- Deposit paid.
- The percentage ownership of each party.
- How to share expenses like the mortgage and bills.
- Share of property income - rent or gain on sale.
- How to sell the property.
- How the property is divided in the event of separation, divorce, or death.
Parent-child joint ownership of house - choosing the right structure
There are several ways to structure joint ownership when buying a house with your parents, each with its own implications for the legal title, financial contributions, and future planning.
Joint mortgage with parents - they're on the legal title
This option involves both you and your parents being named on both the mortgage and the legal title of the property.
- Ownership: You and your parents will jointly own the property, and it's strongly recommended that specific ownership shares are defined in a Deed of Trust.
- Stamp Duty: If your parents already own another property anywhere in the world, this purchase will likely attract the 3% Additional Home Stamp Duty. This is a significant cost to consider. This is often why this structure is more common for buy-to-let properties.
- Mortgage Availability: A wider range of mortgage products may be available when all parties are on the title.
- Responsibility: All parties are jointly liable for the mortgage, meaning the lender can pursue any one of you for the full amount if payments are missed.
An unsecured loan - your parents want the money back
In this scenario, your parents provide you with an unsecured loan to help with the purchase. They are not named on the mortgage or the legal title.
- Loan Agreement: A Loan Agreement is essential to outline the terms, including the amount, interest rate (if any), repayment schedule, and what happens if payments are missed. It's important to note that while a loan agreement is crucial, it doesn't give your parents any ownership stake in the property.
- Ownership: Your parents do not own any part of the property. Their financial contribution is a loan, not an investment in the property itself.
- Responsibility: You are solely responsible for repaying the loan to your parents and making mortgage payments to the lender, regardless of what happens with the property.
- Mortgage implications: Lenders will consider any outstanding loans when assessing your borrowing capacity. An unsecured loan could affect how much a mortgage lender is willing to offer you, but loans from family members are generally accepted by lenders.
- Flexibility: This option offers flexibility for you and your parents. It avoids the stamp duty implications of joint ownership and allows your parents to provide financial assistance without being tied to the property long-term.
Joint Borrower Sole Proprietor Mortgage
A Joint Borrower Sole Proprietor (JBSP) mortgage is a popular option when parents want to help their children buy a home without directly owning the property.
It allows parents to be on the mortgage, increasing the child's borrowing power, but the child remains the sole owner of the property.
- Responsibility: All parties (you and your parents) are jointly liable for the mortgage payments, providing security for the lender. The lender can pursue either you or your parents (or both) for the full amount if payments are missed.
- Ownership: You are the sole owner of the property, giving you more control and flexibility. You can make decisions about the property without needing your parents' consent (unless otherwise stipulated in a separate agreement).
- Independent Legal Advice (ILA): Because your parents are taking on significant financial risk without any ownership stake, they must receive Independent Legal Advice (ILA) from a solicitor. ILA ensures they understand the rules and implications of the JBSP mortgage and are of sound mind.
- Benefits and Risks: JBSP mortgages can help first-time buyers get on the property ladder with increased borrowing power, but the ultimate responsibility for mortgage payments falls onto you (the child).
Arrange a free consultation with one of our experienced conveyancing executives if you are:
- Severing joint tenancy to register as tenants in common, or vice versa.
- Buying with your unmarried partner, to protect your shares in case the relationship breaks down.
- Married or civil partners let a property, and one of you is in a lower tax bracket.
- Buying with friends or family, to protect shares based on initial and ongoing contributions from each party.
- Going to invest money in unequal shares, improvements, or renovations on the property.
- Buying a property with a mortgage, where one or more borrower(s) will not be a legal proprietor.
- Unable to buy the other owner out and want to surrender your share.
Planning for bumps in the road - the importance of formal agreements
Informal agreements between families can seem sufficient, but they are rarely enough to protect everyone's interests in the long run. When buying a property jointly with your parents, it's crucial to have formal, legally binding agreements in place, such as a Deed of Trust and a comprehensive Loan Agreement (if applicable). These documents should address the following:
Mortgage matters - who pays and what happens when?
Clearly define who's responsible for monthly payments. While everyone on the mortgage is legally liable, having a written agreement about the payment arrangement is crucial.
Also, discuss what happens if someone can't pay their share. Will others cover it? How will it be repaid? Missed payments impact everyone's credit. All of this information should be written and formally signed off by all parties. Missed mortgage payments will affect everyone's credit.
Selling the property
Discuss when the property can be sold. Can one party force a sale? What if your parents expect to live there long-term, but circumstances change? Outline the sale process and how proceeds are divided in a well-drafted Deed of Trust.
Repairs, improvements, and occupancy
How will you decide on and pay for repairs or renovations? Who gets to live in the property, and are there any restrictions? A simple, written formal agreement can prevent future headaches such as disputes about ownership.
The future - death, care, and other changes
It's tough to think about but discuss what happens if a parent passes away. How will their share be handled?
Also, what if a parent needs long-term care? How might that impact the property? These conversations, while sensitive, are incredibly important and should be noted down in any connected deed.
Another way parents can help - Guarantor Mortgages
In a Guarantor Mortgage, the parent promises to cover the mortgage repayments if their child defaults. This allows the child to borrow more money, potentially securing a larger or more desirable property.
How a Guarantor Mortgage works
The parent's income and credit history are taken into account when assessing the child's mortgage application. The parent's guarantee effectively reduces the risk for the lender, making them more willing to lend.
Responsibilities in a Guarantor Mortgage
The guarantor is legally responsible for the mortgage repayments if the child fails to make them. This is a significant financial commitment and should be carefully considered. If the child consistently misses payments, the guarantor's credit score can be negatively impacted.
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Caragh is an excellent writer and copy editor of books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey, property law and mortgage-related articles.
