The Bank of Mum and Dad – How to help your child buy a home
Homebuyers, be it first-timers or upsizers, are increasingly looking to the Bank of Mum and Dad for help.
According to the Financial Times, in 2020, gifts from parents, grandparents, friends and relatives were behind more than half (yes half!!) of house purchases among the under-35s, according to a study by Legal & General — and this pattern of lending is expected to continue. A study conducted by online bank Marcus by Goldman Sachs revealed that around 45% of parents with children under 18 think that they will always need to help and support their children financially, according to the report.
For a little more perspective, The Bank of Mum and Dad (BOMAD), is actually considered the 9th largest lender, contributing to 26% of funds to the UK housing market. But believe it or not, it’s not as simple as just ‘giving your little ones money for the future’… Here’s how you can help your children get on the property ladder, and everything you need to know about gifted deposits, tax implications and Bank of Mum and Dad mortgage options.
A financial gift (gifted deposit)
The most conventional way parents or loved ones help their children get on the property ladder is by way of a financial lump sum. Most banks will accept that a deposit or parts of it, may have been gifted but don’t be surprised if they request a written confirmation stating that it is a true gift! There are two reasons why this might be, first, for affordability calculations, they need to know that the money isn’t a loan that will require regular repayments. And secondly, if the worst-case scenario happens, and they had to repossess the house, you don’t have a financial claim to the property.
Remember, there could be implications of inheritance tax. Find out more on the Government website.
Perhaps you aren’t in the situation to simply gift your children the money or even don’t want to. But you can still help them out in the form of a loan. It is relatively straightforward to draw up a loan agreement. This should set out any interest being paid on the loan and when it needs to be repaid – for example when the property is sold. You should also include what happens to the money if anyone involved in the loan dies, or if the parents need the money back.
This agreement will need to be shared with a mortgage lender if one is involved in the purchase but it could have major implications for a mortgage. A loan of this type could affect mortgage affordability calculations as lenders will factor repayments on the loan into the child’s outgoings.
Although, please be aware, that some banks won’t accept a borrowed deposit as the money comes with strings attached. It will potentially limit the number of deals your child will be able to apply for.
The second set of options involves higher stakes and arguably more paperwork for parents, but no money is necessary upfront.
A guarantor mortgage is a product where you, as a parent or a close relative, act as a guarantor for 100 per cent of the mortgage debt. Similar to standing as a guarantor for renting. In layman’s terms, you are agreeing to cover the mortgage payments if your child fails to pay.
Don’t worry though, as the guarantor, you can be removed from the mortgage at a later date once your child can prove they are able to take on the debt by themselves. With this product, it is important to consider if you have multiple children or still may want to move and apply for credit that you may be less favourable with lenders.
Guarantor mortgages aren’t very common but haven’t completed vanished from the market. In fact, Barclays Family Springboard mortgage and the Halifax Family Boost are popular options working on the same principle. Think this could be the best option for you all? Speak to one of our advisors today.
Buy a property with your child
The last option to consider is taking out a joint mortgage with your child sharing equal liability for the repayment of the loan. The upside is that with your combined incomes, you may be able to afford to take on a larger loan.
The big drawback to this plan is the additional stamp duty rate. If you own a property, your child’s new home would be a second home. This means there would be an additional 3% stamp duty due, which could make the property significantly more expensive.
Plus, if it is your second home and you are still on the mortgage when the property is sold, there may be capital gains tax (CGT} liabilities. Some lenders will let you take on a joint mortgage, but your name doesn’t have to be added to the property’s title deeds, allowing you to side-step these tax problems. As with a guarantor mortgage, it is important to consider if you have 1 or more children as taking out more than 1 joint mortgage could be deemed unfavourable to the lenders.
Always make sure you get the right advice before you make any decisions.
Money, whether you’re discussing it with your boss, your lifelong partner, or even your children in this instance, can always be tricky. So if you’re worried about the conversation, Lloyds have a helpful guide to make it easier. If you’re unsure or your mind boggles at the prospect of it, we are always on hand to provide some guidance. Get in touch today.