When buying a home, one of your first considerations is how to pay for it. If you’ve sold a property and you have a lot of equity, or you have the funds available, you may be in the fortunate position of being able to pay for your new home outright. If this is not the case, you will need to look for a lender, such as a mortgage provider or a loan from the “Bank of Mum and Dad” or perhaps the “Bank of Grandma and Granddad”.
The “Bank of Mum and Dad” is perhaps more powerful than we thought. According to new research by Legal & General parents have, on average, provided their children with £6.3billion towards home buying in the last year. This figure means that if the collective lending power of all the parents in the UK was an actual business, it would rank in the top 10 lenders, alongside banks such as Natwest, Barclays and the Royal Bank of Scotland.
On average, parents will give their adult children a contribution of seven per cent of their purchase price, and in the North East, where average property prices are approximately £187,855, according to property website Zoopla, parents could be providing around £13,149 to help their children climb on to the property ladder.
Obviously not everyone has relatives who are in a position to help, and there are fears that pressure could leave some parents in financial difficulties in their later years.
The L&G research found that more than 50 per cent of parents helping their children with a deposit were using cash obtained either by withdrawing from their pensions or using equity release from their own homes.
In addition to this, the survey found that more than a quarter of parents were not confident that they would have enough money to last through their retirement, and 15 per cent said they had already accepted a ‘lower standard of living’ due to financially supporting their children.
However, if a parent makes the decision to become a lender in the Bank of Mum and Dad, it’s important to think about all of the implications involved. Gifting money either outright or via lifetime trust a can have Inheritance Tax (IHT) consequences and in many cases benefits, which can actually provide a win-win scenario for parent and child.
Another consideration is that the parent may want to help their children with a house purchase, but can’t afford to hand over the money indefinitely, and they will need to decide, and make clear, whether the money is a gift or a loan.
Any loan agreement will have to be disclosed to a mortgage provider to be factored into the affordability assessment and the mortgage provider will need to be aware of any regular payments the applicant will be making. This may seem like giving with one hand and taking with the other, but it is vital that mortgage providers have an accurate picture of income and expenditure to determine if the mortgage is affordable.
There are other very important issues to be considered and appropriate legal advice to be obtained before a parent, or perhaps a grandparent, makes a gift or loan to a family member.
While the “Bank of Mum and Dad” may well be one of the most generous lending facilities in the land, with low or no interest repayments, and often debts being written off entirely, it’s important to seek professional advice to make sure both parties know where they stand, to reduce the risk of future family disputes in the future and to understand all the other risks, implications and issues.
Please note: This article is intended as guidance only. No responsibility for loss occasioned/costs arising as a result of any act/failure to act on the basis of this article can be accepted by Latimer Hinks. In addition, no responsibility for loss occasioned/costs arising as a result of any act/failure to act on the basis of this article can be accepted by the firm.