Fear of damaging relationships stops first time buyers from seeking legal protection
The prospect of buying a starter home on an independent basis is becoming increasingly difficult to achieve due to rising cost of homes pushing those on their own further out of the market.
As a result, first time buyers are resorting to ever more complex ways to finance the purchase of their first property. Law firm Simpson Millar conducted research which indicated the contribution of multiple parties funding the cost. The growing intricate nature of property transactions can be seen in the study’s findings as almost half (47.5%) of the 1,000 people asked predict the need to utilise three or more additional means of financing their first home. The supplementary means may encompass loans as well as gifts from parents and other relatives, getting together to purchase with friends or utilising a governmental scheme. This illustrates a shift away from a time where the younger generations were able to simply obtain a mortgage through saving for a deposit and moving in to a new house, whether they be with a partner or alone. The figure of first time buyers expecting to employ at least two means additional to their own in order to finance a purchase has grown to 70%.
The increasingly convoluted nature of property purchase naturally leads to the nature of deposits being uneven when coming from different sources. However, 33% of those placing the deposits would not secure their financial contribution with a legal agreement should a relationship breakdown occur. The findings also illustrate that for 18% of those who have put down uneven deposits, a legal agreement would not be sought for fear of “damaging trust” which may in turn jeopardise a relationship. Where financial proportions are unequal in nature, a legal contract stating the source of each contributor and their share would secure protection of their input. In the absence of a formal legal contract where a breakdown does occur however, the prospect of attaining the original share given cannot be guaranteed. This could therefore lead to even greater complication and upset should party dissolution occur, ironically as a result of attempting to avoid it in the first place. If contributing to a purchase through an unequal means where joint buyers have contributed to a house purchase through unequal means, attaining their respective share following a breakdown cannot be guaranteed.
Commenting on the imbalanced nature of property purchase for first time buyers is Lisa Gibbs. The Conveyancing Partner at Simpson Millar Solicitors highlights the often familial or close nature of those contributing to the transaction can mean a lack of willingness to attain legal protection.
“It isn’t romantic or fun to be the one insisting on legal protection of your financial contribution. But without one, a fair division of assets and the protection of ‘the family silver’ cannot be guaranteed if the property does need to be sold and proceeds divided at a later date – as is so often the case”.
The research also indicates the continuing popularity of expectance of parental contribution. Almost a third (32%) of those looking to buy their first home predict they will receive a gift from their parents in respect of their starter home purchase price with 26% expecting a loan. Inheritance money is similarly anticipated to be used by almost a quarter (24%). Recognising the growing nature of this trend is Mike Bowen. The solicitor from Jevons Riley & Pope highlights the sympathetic nature of lenders in regards to the gifts alongside procedural structures which deal with advice for the client also. He does however express concern over the potential implications of a contribution that parents may be unaware of:
“I suspect that the parents are given little or no advice on how a gift could affect them in the future and I doubt their source of funds are checked as clients own funds are. Both are potential issues leading to problems.”
Bowen continues by highlighting the additional costs faced by parents even where protection may be sought:
“Often we would protect the parents interest with a nominee declaration of trust and a form B restriction. However, the SDLT changes mean if as is normally the case the parent owns a house then Higher Rate SDLT is payable. At the time Cilex argued that this was unfair and not intended and would stifle the market and assistance to first time buyers. As it is unsecured loans may be the only way forward which is not ideal.”
Governmental support schemes for those buying their first home has also increased in utilisation, with over a third (38%) expect to seek support from the soon to be scrapped Help to Buy ISA with the Lifetime ISA attracting 12%. 10% intend to make use of a Help to Buy Equity Loan and 13% the Help to Buy Mortgage Guarantee Scheme.
Gibbs further comments that although contributions from a network of relatives and friends can be “heart-warming”, the prospect of future difficulties for families is prominent and highlights the ease of putting a legal agreement in place.
“…the potential for equity held in the property to be divided in a way that is unfair on one joint owner and their benevolent families is a real one – and a risk families and their loved ones need to take seriously at the point of purchase, when legal protection by way of declarations of trust can be put in place easily. You wouldn’t sign a £20,000 plus contract for anything else in life without reading the small print. But when it comes to property, emotions can get in the way of common sense.”