The pros and cons of borrowing from the ‘Bank of Mum and Dad’

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The Telegraph look at how borrowing from parents can be a huge benefit to getting on the property ladder but also raises some common issues that occur.

The “Bank of Mum and Dad” is estimated to lend more than £6.5bn to help children on to the property ladder, making it the ninth-biggest lender in the country and a bigger player than Clydesdale Bank.

Parents helped provide deposits for more than 298,000 mortgages last year, representing 26pc of transactions. In most cases children are simply given the cash with no strings attached. Some “Bomads”, however, will offer an interest-free loan and others will expect some sort of return, financial or otherwise.

Regardless of the exact offer, Bomad is by no means risk-free. Here we answer the questions you need to ask if you decide to ask for help from your parents.

Will Bomad make you take an affordability test?

Parents are unlikely to ask for six months of bank statements to ensure their children don’t have a secret gambling problem. But the bank will.

The lender will scrutinise income and outgoings and will ask for information about any debts. And if the bank is satisfied that your penchant for tumeric lattes and broken cassette tapes won’t affect your repayments, why wouldn’t your parents be?

What happens if Bomad goes bust?

If one or both of your parents are declared bankrupt after they’ve given or lent you money to buy your home, the trustee in charge of liquidating their remaining assets is likely to come knocking on your door.

In a worst-case scenario they could force you to sell up. If you have a loan agreement in place which states that the money is repayable on demand, the trustee can call for immediate repayment.

And if your parents gave you the money for a slice of the property, the trustee can demand the cash equivalent of that portion.

Even a cash gift with no strings attached can be overturned if Bomad goes bust, said Andrew Leakey, a partner at Stephensons Solicitors.

“A written agreement that does not state the money is repayable on demand could protect the children if the parent is declared bankrupt”, said Mr Leakey. “However, lots of parents would insist on these terms to give them more control over the loan.”

What interest rates does Bomad charge?

In most cases parents give money to their children as a gift. According to Legal & General, the insurance company, in 57pc of cases the money is not paid back. And just 4.8pc of Bomad loans are repaid with interest.

Andrew Boast, director of Sam Conveyancing, said the majority of parents he dealt with just wanted to get their children on the ladder. But there will be some who get a financial return on their investment.

Reasonable Bomads are unlikely to charge more than traditional lenders. Instead the rate may be more in line with standard savings rates, say around 1pc a year.

Are there hidden costs?

Yes. Bomad loans are not known for their transparency, even if there is a contract in place.

Some borrowers told Telegraph Money that, after they bought their house, their parents began to show up for “surprise sleepovers” every other weekend.

The criteria of some of the stricter Bomads may require borrowers to look after parents in their old age or accompany them to regular events such as “Knit and Natter” sessions or village book club meetings.

Be warned. These terms are unlikely to be outlined clearly, if at all.

What if Bomad mis-sells me a loan?

The mis-selling of a Bomad loan is unlikely, said Mr Leakey, as no one is selling anything. Essentially it’s an agreement between individuals with a relationship.

What is more common is confusion as to whether the money is a gift or a loan. In these cases, the financial ombudsman is not going to be able to help parties come to a resolution.

If nothing is put in writing and the parties cannot agree, children or their parents will need to take the other to court.

The court will then look at what was said at the time; for example, if there were any emails or letters suggesting that the cash was a gift or a loan or whether any repayments have been made.

Your bank will also want to know if the money is a gift or a loan so that if the property is repossessed it knows who else could be fighting to get their cash back.

What if I get married?

According to Mr Boast, Bomad is often concerned about the prospect of their child’s partner benefiting from the loan or gift. This is a bigger issue than ensuring that repayments are met or earning interest, he said.

If you’re purchasing a home as a couple, Mr Boast suggested drawing up a “deed of trust”. This will mean that if the relationship breaks down, everyone gets out what they put in.

Have you had a nightmare with Bomad? Email amelia.murray@telegraph.co.uk

Read more at The Telegraph