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Bank of Mum and Dad & Divorce

 

The bank of Mum and Dad is now a major lender in the property market.  But what are the consequences of lending money to your child should they be purchasing a property with their spouse and then that relationship later fails – what happens to your money on their divorce?

It depends on what you agreed in the first place.  Usually the mortgage lender involved will want to know whether the money from the bank of Mum and Dad is a gift or whether they are to have an interest in the property.  If you say it is a gift, then that is what it is.  You cannot change your mind later.

If it is a loan, what is involved?  You can elect to protect your interest in the property, by either entering into a deed of trust or registering a second mortgage over the property.  In both cases the mortgage lender will need to approve.

It may well be that you come to the conclusion that you do not want an interest in the property, but you do want the money to be repaid.  If that is the case, you need to enter into an unsecured loan agreement with your child and their spouse.  Setting out the terms of repayment and whether interest is to be charged.

It is essential that the bank of Mum and Dad take their own separate legal advice about the implications of gifting or loaning their children money.

This situation does not just arise on a purchase of a property.  It can arise at any time.  For example, the wife’s parents receive an inheritance, and wish to pay of their daughter’s mortgage.  Is this a gift, an advance on the daughter’s inheritance from her parents or are the parents obtaining a share of their daughter’s property?

What normally happens is that this issue is raised for the first time when unfortunately, your child is separating from their spouse and there is a dispute as to who should get what.  Before that it is usually a “family arrangement” that all members of the family think they understand.  Their views and understandings later transpire to be very different!   Usually the bank of Mum and Dad do not take legal advice and there is no clear evidence of what was intended.

In a divorce, the spouse will usually argue that any money received from their former in-laws was a gift and not a loan.  The child will usually argue that the money received from their parents was a loan and not a gift.  If nothing was agreed at the time of the purchase, what will a divorce court think?

If the bank of Mum and Dad think they have an interest in any property or asset, they may be invited by the court to “intervene” in the proceedings.  What this means is that the court will hold a discrete hearing on whether the parents have an interest in any matrimonial property and look at the available evidence.  The court will want to see the evidence from the time the money was paid.  The court will then make a decision on that issue before dealing with the remainder of the financial settlement between the spouses.

If there is evidence of a loan, then it is usually easier for the bank of Mum and Dad to establish an interest in a property, particularly if there have been regular repayments made.

If no repayments have been made the court could say it is a “soft loan”. This means the court could say that the child will not have to pay their parents back, as the Bank of Mum and Dad do not require repaying. The court could also say that the bank of Mum and Dad is likely to loan the money to their child again in the future. Therefore, the bank of Mum and Dad do not have an actual interest in the property.

Alternatively, the court could rule that the money was a gift and that it can be used to achieve a fair financial settlement between the spouses.

It is therefore essential that whenever the bank of Mum and Dad become involved financially with their children, the bank needs legal advice as to the implications as to what it might mean if there is a later divorce.

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