Gardner Leader

With the mortgage market tightening its reigns, more and more people are entering property transactions using financial support from their parents. Stuart Durrant, Conveyancing Partner at Gardner Leader Solicitors, advises on the best way to enter such an arrangement.

The current Credit Crunch has led to one very obvious result in the residential property market – if you don’t have a large deposit to put down on a property, either you won’t get a mortgage, or if you do, the loan will be at punitive rate.

Tracker mortgages no longer exist for those with less than a 20 per cent deposit and those who already have them have seen their rates shoot up considerably over the past few months.

Similarly, lenders' standard variable rates, which have become more attractive with the succession of base rate cuts, are virtually unavailable to new customers and certainly not for those with small deposits.

For example, a quick look at today’s rates shows that if you have a 40% deposit on your new property, Cheltenham and Gloucester will lend at a rate of 3.89%. If you have a 10% deposit, the rate is 6.19%.

Put simply, the banks are rationing deals to all but those with the biggest deposits who are at the lowest risk of defaulting on their repayments.

This has increasingly led to first time buyers approaching their parents (aka ‘The Bank of Mum and Dad’) for help with their deposits, to get themselves into the cheaper lending bracket. If you are lucky enough to have parents that are able to help, or on the flip side, unlucky enough to have your children request your help, it is important that you draw up an agreement that will include information such as, who has put a share into the property, who owns what and what happens in the event of one of you wishing to bring the arrangement to an end.

A trust deed, or declaration of trust, sets out the share of equity to which each owner is entitled on sale. The owners can devise whatever formula they wish for working this out. The formula might include reference to differing contributions to mortgage payments, household bills or maintenance costs, as well as initial contributions to the purchase price. However, it is entirely up to the owners how they want to work their final shares out when they come to sell, or terminate the arrangement. What is set out in the trust deed, or declaration of trust, will be definitive.

To make this arrangement work, both parties need to:

• Feel comfortable with the arrangement. This sounds a bit ‘touchy-feely’ but it is important!
• Draw up a trust deed, or declaration of trust, with which you are both happy.
• Be reasonable with each other, discussing and settling any potential areas of dispute.

Primarily details of how the profits from the house will be split when you come to sell, will be covered in the declaration of trust, and also cater for the possibility of sharing the losses. You have to decide what suits you and how much flexibility you need. It is important to work with your solicitor on this area, as part of the purchasing process, and come up with a document that suits your unique circumstances and that satisfies you all.

In my experience, disputes generally arise when the issues such as those outlined above have never been discussed, and each party has formed their own private opinion about how they should be resolved. The advantage of the declaration of trust is not only that the preparation of the document necessitates discussion of the issues, but it also records agreements on those points for the future.