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The Bank of Mum and Dad and the Mortgage Credit Directive - should parents be worried?

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Getting onto the property ladder can be a tall order these days. The increasing cost of living has made scraping together a deposit all the more difficult – with many now relying on the bank of mum and dad to help them out. Some companies are also helping out and offering to assist employees with buying a property. It can be an enticing benefit in places with high property prices.

The tricky part (and an area we often provide advice on) is figuring out if such a loan is a personal loan, a mortgage or a gift? The answer depends on a number of things and will have an impact on what the lender has to do.

A regulated mortgage contract (RMC)

Entering into a RMC is a regulated activity. A loan is a RMC if it is made to an individual and repayment is secured by a mortgage or charge on land, at least 40% of which is used, or intended to be used as a dwelling. There are many exemptions and it can be a tricky process to decide what is caught and what is exempt. The loan will only be regulated if it is made “by way of business”. If it is, the lender will need to be authorised by the FCA (which is itself a long and costly process) and will have to comply with the mortgage rules in the FCA Handbook which were improved last year under the Mortgage Credit Directive (MCD).

By way of business

The key question is whether it is being offered “by way of business”. This is not an easy point to decide. It may seem surprising but even a one-off loan can be deemed to be made by way of business[1]. It comes down to a judgment call based on a number of factors. A substantial loan, which is secured with a commercial interest rate, suggests it is a business loan. With the rise in property prices a helping hand from mum and dad will usually be for a substantial sum. It is also not uncommon for interest to be charged (even at a low rate) to make up for the interest mum and dad will lose out on by not earning interest on their savings. Although this won’t be much given how low interest rates are. Is this by way of business?  It’s a balancing act. The FCA has given some guidance on this. Factors to be taken into account include the size of the activity and whether there is a commercial element.

When providing a loan, particularly a one-off loan to a family member, it can be easy to overlook whether it could be regulated. Just because it is being offered by a parent to a child or by a company to an employee is not enough to avoid regulation – this is only one piece of the puzzle to think about.

The critical question to ask is whether the loan being offered is “by way of business”. This is not clear cut and can often lead to some surprising results. Applying interest which makes profit can suggest it will be a commercial loan. If there have been previous loans made to employees or even to older children to help them with out with buying a property, it could be argued this pattern shows this is not just a personal loan but a commercial activity. It is important to go through these checks to decide whether the loan will be caught as a RMC.

Ultimately the risk of getting it wrong is the agreement and other pre-contract information does not comply with FCA rules. You will also need to consider whether you will need to be FCA authorised. For a payment to a child to help fund a house deposit often this will not be an issue as the mortgage provider would insist on confirmation from the parent this is a gift and is not repayable. This would take it outside of regulation as it would not be a loan in the first place. For a company getting this wrong can be a serious issue. Failing to be FCA authorised is a criminal offence and can in the worst case scenario lead to imprisonment or a fine.

So if you are planning on offering a loan make sure you do your homework. Remember failing to prepare is preparing to fail – it could be costly if you don’t and just not worth the risk.

[1] Helden v Strathmore Ltd [2011] EWHC 2012 (Ch) (affirmed [2011] EWCA Civ 542)

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