Are you the bank of Mum and Dad?
Your children are adult now and making their way in the world – you should be off the hook financially, shouldn’t you? Well, with house prices rising higher than ever and millennials being burdened by higher education loans and renting costs, many still end up falling back on the ‘bank of mum and dad’. More and more of the younger generation are turning to their parents or grandparents for loans or gifts to fund deposits on a house or other big purchases. Should you loan money to your children or should they
It’s your money, your choice – there should be no obligation
It goes without saying that you shouldn’t feel obliged to lend money to your adult children. You’ve supported them throughout their childhood and given them the means to get out in the world and make their own income. But your money is your money, and there should be no obligation to part with it unless you choose to. Lending a big chunk of money could have a considerable impact on your own financial position, for example when you’ll be able to retire, or if you can take that dream trip you’ve been waiting to go on for years. There’s a big difference between offering a loan to your
You should also consider whether you’re helping your adult child to build good financial habits, rather than continuing to rely on you to bail them out. have they failed to meet other financial arrangements and damaged their credit score? Also, Make sure you think about whether you will be able to offer the same financial support to all of your children – it could cause conflict if you lend money to one and not to another.
Make sure you are financially secure before you loan any money
Don’t commit yourself to
When it comes to
Have a clear plan for how and when you will get your money back
You’ll need to think through and plan for every eventuality – no matter how awkward it may seem. Will your son or daughter be able to pay you back? How soon would you like to get your money back, and is it feasible that they’ll be able to pay you back within this timeframe? What will happen if their financial situation changes – for example, they lose their job and can no longer afford to make repayments on your
If the money is going into a house deposit for your child and their partner, it’s a good idea to have a plan in place as to what would happen to your money if they separate. No one wants to think about these things, but it’s much better to be prepared ahead of time in case it does happen. Have a solicitor draw up a ‘declaration of trust’, which states how the property will be divided in the event of
House deposits: Be very clear on whether you are gifting or loaning the money to your children
One of the main reasons children ask their parents for a loan is to scrape together the lump sum needed to put a deposit down on a house. With house prices rising 91% between 2000 and 2011, and salaries rising just 40% in the same period, it’s harder than ever for the younger generations to get on the property ladder. It’s understandable then that many are dependent on a loan from mum and dad, or even a grandparent, to buy their first house.
However, you must be very clear whether you are giving the money as a gift, or as a loan. This distinction even has legal implications and can affect whether their mortgage application is accepted or not. Banks and lenders tend to look more
Talking money with family can be a tricky subject, and lending money to family members even more so. Here we’ve covered all the questions you need to ask yourself before you decide to lend money to your adult children. You need to have a strategic plan as to how long you’re lending the money for, how and when you’ll expect to get paid back, and what happens in case of a sudden change in financial situation or circumstance. It definitely is possible to lend money to your children without any fall-outs or arguments, and thinking through the points in this article should make this process easier for everyone involved!