Bank of Mum and Dad - is that debt or equity you are offering?

Bruce Greig
September 17, 2020

I’ve seen several situations where parents have helped their offspring buy houses. In none of these situations have the family thought carefully about whether they are providing debt or equity funding.

Child buys a £350k home. Parents chip in £35k to help them afford it.

Are the parents lending their child £35k (debt)? In which case, they will be expecting the child to pay them back the £35k when they can afford to (perhaps with interest, perhaps not).

Or are they buying 10% of the house (equity)? If the home doubles in value in the next ten years, then the parents might be expecting £70k when the child sells and moves on.

In the equity example, what if the child has put in a new kitchen? Or built an extension? Do the parents still own 10% of the whole value of the house, even though they did not contribute to the improvements?

Inter-generational help going the other way can also cause problems. Son and daughter-in-law convert their garage into a granny annexe for Mum, which Mum pays for. They feel they are being dutiful by agreeing to have Mum come and live with them.

Mum dies a few years later. Son and daughter-in-law now have a much more valuable house, because it has a granny annexe.

Sister objects, because Mum didn’t pay to improve her house. Son and daughter-in-law think this is outrageous - they, not the sister, are the ones who cared for Mum in her final years.

If you don’t think these things through, and write something down, you can easily get into acrimonious disputes, even though everyone is acting with the best of intentions. No-one tried to rip anyone off in these commonplace situations. But, still, a fierce argument arises.