A large number of starter homes are purchased with the help of parents. But can all parties be sure that the agreement is safe – both financially and legally? Attorney Andrew Titmus casts his expert eye on a reader’s scenario
The question
My husband and I want to help our daughter get on the property ladder using a Joint borrower, sole proprietorship mortgage. Our daughter would like to buy her first house with her partner and they have been together for two years.
We worry a little about what might happen to our money and credit if, for example, her partner defaults or they split up.
Obviously we want to help our daughter and her partner, but we also want to make sure that we go into this with our eyes open and prepared for any problems that may arise.
Andrew answers
In private client law we normally consider five different life events and how they can affect people’s futures – death, loss of mental capacity, marriage/divorce, relationship breakdown and financial problems – our ‘five sources of mischief’.
Whenever there is financial interaction between people, it is always useful to keep these five different events in mind and understand the risks involved as well as the options to mitigate them.
Dead
In this case one of you, your daughter or her partner. If something happens to you, you may have to pay off the mortgage (the security is gone).
If your daughter or her partner were to die, you may also need to repay the mortgage and the sale of the property may be delayed by the probate process. In this case, mitigation may take the form of sufficient life insurance placed into a trust.
This may be an appropriate way forward. In addition, your daughter and her partner should consider their position and seek estate planning advice. If a couple has lived together in a relationship for two or more years (or if they are financially dependent on each other), there may be a claim by the surviving spouse upon death.
As long as they are unmarried, a cohabitation agreement can help limit some of this risk.
Loss of capacity
If your daughter or her partner were unable to work and pay the mortgage, the liability would fall on you and you worry about the impact this could have on your credit rating if problems arise.
Once more, insurance (critical illness and/or income protection insurance) can provide some relief here.
Marriage/divorce
If your daughter and her partner were married and then divorced, they may have claims to each other’s assets. This may not affect your security on the mortgage too much unless it was defaulted, but it is more difficult to protect against it. Your daughter may be advised to consider a prenuptial agreement.
Breaking up of relationships
This is not necessarily just between your daughter and her partner, but also between you. If your daughter and her partner separate, you are right to be concerned about a possible shortfall in mortgage payments.
Hopefully they will purchase the property with a good declaration of trust setting out their respective interests and obligations in relation to the mortgage, making up any shortfall, but life can be difficult in the meantime.
It can also be very difficult to alleviate this. Likewise, if your relationship with your daughter breaks down, she may not be able to pay the mortgage ‘out of spite’, and it wouldn’t necessarily be quick for you to extricate yourself from that situation.
Financial problems
Much of the above in terms of mortgage non-payment is similar, but it would be worthwhile for your daughter to understand that her partner’s interest in the property would be to pay off his debts in the case of a problem and emphasizes the need for them to do so. obtain good advice about the purchase and the risks involved. If you lose your job, income insurance can provide a solution.
While you can’t guarantee everything will go wrong, it’s best to understand all the risks and apply mitigation where possible (knowing that you may not be able to control everything) or accept the risks.
Ultimately, you must decide whether this is a position you should be in and whether the mitigation is enough to protect you.
Andrew Titmus is a partner, head of the wealth planning department and private client lawyer at Parfitt Cresswell