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Bank of Mum & Dad

Sunday, June 04, 2017

According to the Centre for Economics and Business Research thinkank, parents in the UK will stump up £6.5 billion to help their kids buy property in 2017, helping to fund 26% of all new home purchases in the process.

If you are interested in helping your child or family member onto the property ladder, here are some of the key factors you need to consider:

1. Can you afford it?

If you want to help your kids out financially, the first thing you need to work out is: can you afford it? Some parents will have savings or investments they can cash in. But others will need to borrow money against their home to help their kids out.
There are several ways to do this. Some parents could remortgage to release equity in their home, while those who don’t want to switch mortgage deals could get a loan secured on their home instead. Older borrowers might be interested in equity release schemes which allow you to borrow money against your home, with the capital and interest repaid after your death or when the property is sold. If you decide to borrow money to help your children, it’s a good idea to get some professional financial advice first.

2. Helping with a mortgage deposit

The most common way parents help out is by giving their child some, or all, of the required deposit to qualify for a mortgage. Lloyds Bank says the average loan first-time buyers received from family is almost £24,000. But it doesn’t stop there – almost one in five 'second steppers' return to the Bank of Mum and Dad to move up the ladder, typically asking for £22,000. Parents who want to help their kids with a deposit can either gift them the money, or lend it to them.

3. Gifting money

Gifting money can have consequences for Inheritance Tax (IHT). IHT is paid if a person’s estate is worth more than £325,000 when they die. However, a new rule introduced last months means someone can pass on an addtional £100,000 if they're leaving property to a family member (rising to £175,000 by 2020). The donor must live for seven years after giving the gift for the amount to be exempt of IHT. Any gifts made less than seven years before death count towards the threshold. Obviously, no one knows when they are going to die which makes IHT planning tricky. In an ideal world, parents would give their child as much as they want or need, then survive for seven years or more.

Some gifts are exempt from IHT. For example individuals can give £3,000 away each year with no IHT implications. Leftover annual exemption can also be carried over from one tax year to the next, but the maximum exemption is £6,000.
You can give away more if the recipient is getting married or entering a civil partnership – £5,000 if it’s your child, £2,500 if it’s a grandchild or great-grandchild, and £1,000 for anyone else.

4. Lending money

Some parents may prefer to lend their children money, with it being paid back monthly or at some point in the future – when the property is sold, for example. Drawing up a loan document can be fairly straightforward and should set out any interest payable and the repayment schedule. It needs to be signed by both parties. Ideally the agreement would set out what will happen to the money if one of the parties dies, or if the parent needs the money back. If your child is buying a property, any loan agreement would need to be disclosed to the mortgage lender to be factored into the affordability assessment. 

5. Guarantor and joint mortgages

Parents can also help their children onto the property ladder by acting as guarantor on their mortgage. This means their income is taken into account when agreeing a mortgage deal, potentially allowing the child to borrow more. However, as a guarantor, the parent would have to agree to cover the child’s mortgage payments if they were unable or unwilling to do so.
Another option is for parents and children to take out a joint mortgage on a property. The difference here is that the parent would legally own a share of the property. Both parties would be jointly liable for mortgage repayments.

6. Offsetting savings

Some mortgage lenders offer products which allow parents to offset their savings against the child’s mortgage, meaning they qualify for a much cheaper deal. For example Barclays offers the Family Springboard Mortgage. It allows first-time buyers to purchase a property with just a 5% deposit. The buyer’s “helpers” deposit 10% of the purchase price in a Barclays Helpful Start account – where it stays for three years. After three years the helper gets their savings back, with interest, assuming certain conditions have been met. The selling point is that the rate for the Family Springboard Mortgage is significantly cheaper than a mainstream mortgage that you could get with a deposit of just 5%.

The most important thing is to get great advice for your personal circumstance. Helping your children achieve their first home is a commendable wish and you shouldn't be financially disadvantaged for doing so. Before doing anything contact us and we can help arrange a free information appointment with a qualified financial advisor who would be happy to help.

Article taken in part from

Important Information
All property sales and the financial advice that surrounds them are as unique as the people engaging in the transaction. It is important to not make a decision without seeking professional advice. If you want to sell your home and are considering redecorating before marketing, speak to one of our Property Professionals to get the best advice for presenting your home for sale before making any investment.

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