The Bank of Mum and Dad
Without doubt, buyers these days are finding it harder than ever to get a mortgage and to make a start on the property ladder.
Parents and grandparents are increasingly being called upon to help younger family members buy their first or even second homes.
A report published recently for the BBC has shown the number of first time buyers relying on “the Bank of Mum and Dad” for financial help has now reached an all time high with more than one-third of home buyers in England depending upon family financial contribution. The same report claims that a further 10% of buyers are also reliant on inherited wealth.
Home ownership figures for those aged 25 – 29 have dropped dramatically in the last ten to fifteen year period with the implication being that those eventually able to afford a property are now doing so at a much later age.
So, as a parent or grandparent, how can you help?
The most obvious solution is to gift money, although possibly not most desirable or even possible. From a tax planning point of view, so long as the donor lives for 7 years, there will be no Inheritance Tax payable in respect of the gift.
Not every parent or grandparent, however, is fortunate enough to have excess funds available to make such a gift possible, however much they may wish to do so. There are several ways, however, in which monies might be raised:-
- If parents or grandparents have a large amount of equity in their home, or even own it outright, it may be possible to mortgage the home and to release the monies raised by way of a gift to the younger family members. More structured equity release schemes might also be available.
These are not steps to be undertaken without careful consideration and specialist advice but can also be used as part of a tax planning exercise making the funds release particularly worthwhile.
- If a parent or grandparent can act as a guarantor to the mortgage of the younger family member, this may assist them in borrowing more than might otherwise have been made available. Only certain lenders now deal with guarantor mortgages and each of these lenders will have different requirements and criteria to be met. Each scheme will have benefits and drawbacks and the “older” generation will need to be very clear about how they themselves may be affected if things were to go wrong.
- The easiest way for parents/grandparents to financially help is to simply gift the monies needed for a deposit. Mortgage lenders insist that deposit money is a gift – not a loan – and will usually require a letter from the donor confirming the money does not have to be repaid.
If parents/grandparents are not prepared to make a gift and are insistent that the monies being made available are a loan, a mortgage lender will normally take the loan repayments into account when working out how big the “child’s” mortgage might be – this will probably mean that the available mortgage will be much lower than had the deposit monies been gifted.
Having passed on money to the younger generation whether to buy a new property outright or to help with a deposit, it is important to encourage the “child” to consider what will happen to the money if they “split” in due course from a partner. It may indeed be a small price to pay to take professional advice at this stage and which might ultimately protect the family cash.
The above are but a few suggestions on how assistance might be provided by the older generation to younger family members. Before taking any steps it is crucial that a donor should think very carefully about whether he/she can financially afford to help – not just now – but over the next five to fifteen years. Sound professional advice should be sought from an experienced property Solicitor – the child must get the best mortgage deal available to them and the donor must fully comprehend all and any terms and conditions before signing up to any equity release, re-mortgage or guarantor scheme.
- Lastly, one other and obvious alternative to the above to help out the younger generation save for a deposit, would be to welcome them back into the family home and to allow them to cut down their outgoings. Each to his own………..!
Patricia Gray, Partner