Bank of Mum and Dad – key considerations in the current economic climate

Posted: 19/09/2023

This summer, certain mortgage rates reached the highest levels since the 2008 financial crisis. In this climate, it is the ‘Bank of Mum and Dad’ (colloquially known by the acronym ‘BOMAD’) that has become one of the UK’s biggest mortgage lenders. If you are in the fortunate position to receive this assistance, it can help you to get on the property ladder, but there are important considerations that you need to keep in mind from a divorce perspective.

This article details both the pre-emptive steps that should be taken prior to borrowing from BOMAD, but also how the family courts deal with gifts/loans from BOMAD on divorce. In considering the former, it is helpful to start with the approach of the Family Court, which will inform the preparation that needs to be done when borrowing from BOMAD.

Approach of the Family Court

The issue that most commonly arises for divorcing couples is whether the money was gifted by the parents, in which case it would be available to split on divorce, or whether the money was lent, in which case it should be excluded or included as a liability.

The default position of the Family Court seems to be to consider assistance from BOMAD to be a ‘soft loan’. This description is misleading as, in these circumstances, a soft ‘loan’ is actually re-categorised as a gift.

The case of P v Q (Financial Remedies) [2022] EWFC B9 was the first to set out, in detail, the characteristics of both hard and soft loans.[1] This list includes (but was not limited to) the following:

Soft loans:

• an obligation to a friend or family member with whom the debtor remains on good terms and who is unlikely to want the debtor to suffer hardship;
• the obligation arose informally and the terms of the obligation do not have the feel of a normal commercial arrangement;
• there has been no written demand for payment despite the due date having passed;
• there has been a delay in enforcing the obligation;
• the amount of money is such that it would be more likely for the creditor to waive the obligation either wholly or partly, albeit that the amount of money involved is not necessarily decisive, and there are examples in the [legal] authorities of large amounts of money being treated as being soft obligations.

Hard loans:

• it is an obligation to a finance company;
• the terms of the obligation have the feel of a normal commercial arrangement;
• the obligation arises out of a written agreement;
• there is a written demand for payment, a threat of litigation, or actual litigation, or actual or consequent intervention in the financial remedies proceedings;
• there has not been a delay in enforcing the obligation;
• the amount of money is such that it would be less likely for a creditor to waive the obligation either wholly or partly.

Considerations at the time of borrowing from BOMAD

Bearing the above in mind, some clear guidance emerges as to what should be done when borrowing from BOMAD.

In order to ensure that any borrowing from BOMAD is categorised as a hard loan rather than a soft one, it is essential to take legal advice considering your options, which include, but are not limited to, the following:  

• a pre-nuptial/post-nuptial agreement to protect the money lent;
• a declaration of trust with your parents when you purchase a property which will legally document their share of the property;
• a formal loan agreement. To increase the likelihood that the court will give proper consideration to this document, include:
  • chargeable interest on the amount;
  • triggering events for the repayment; and 
  • regular repayments towards the loan;
• a trust arrangement. 

Procedure if there is a dispute – intervening  

If you are going through divorce proceedings and you or your parents feel strongly that the money that they have provided to you as a family (be it for the purchase of a larger family home, payment of private school fees or assistance with legal fees) should be classified as ‘hard’, but your partner is alleging that it was a gift, then your parents will need to consider making an application to intervene in the case (known as a ‘joinder’). This gives them the opportunity to be heard by the court.

The Family Court has the power to join parties to a case of its own volition, but it is more often the case that the parents, or the party who has benefited from the payment made by the parents, make the application. This application should be made at the earliest possible opportunity.

The test applied is whether it is ‘desirable’ to join the parents so that the court can resolve all the matters in dispute. Whilst this is not a difficult threshold to overcome, it is important to take careful legal advice as to the proportionality of making an application to intervene. The risks in doing so involve an increase in costs and delay to the case. This is because the parents will need to be separately represented and will need to file their own evidence. There will then be a separate preliminary hearing on the matter. In addition, if your parents’ application is unsuccessful, there is a risk that they would face paying the costs of your partner for the preparation for, and attendance at the hearing.

If, on balance, it is not considered proportionate to intervene, it is still possible to apply for your parents to be heard as witnesses giving written and/or oral evidence in respect of the arrangements in place.

The court has a wide discretion when considering issues arising from payments from BOMAD and it is therefore important that specialist legal advice is taken at an early stage.

The Penningtons Manches Cooper family team is well versed in representing clients whose parents have provided financial assistance which is being challenged on divorce. They are also frequently asked to represent parents who are considering intervening in proceedings. If you would like any further information, please contact our family team.

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