May 17, 2022
6 min read
With the ever-increasing property prices, many parents up and down the country are helping their children to step onto the property ladder by lending (or giving) them money for the deposit. This trend of dipping into the Bank of Mum and Dad is booming as two-thirds of parents have helped their child buy a home by helping with the deposit, with the average contribution amounting to £32,440, research has found.
If you’re under 35, more than half (56%) of your friends are likely to have been given a leg up onto the property ladder by a financial gift or loan from parents or other family members. But it’s not just millennials and Gen Z who need the support. The Bank of Mum and Dad lent £2.14bn to the over 35s in 2020, according to Legal and General, which shows that parents are helping next-steppers to buy their property, not just first-time home buyers.
But it’s not always as simple as receiving a handout. Here’s how one of the biggest lenders, the Bank of Mum and Dad, can help buyers today.
There are several ways families can support their children buying a home:
A popular course of action also tends to be the least problematic (depending on your own situation). Parents with enough money put aside can make a financial gift to their children to boost their funds for a deposit. The Bank of Mum and Dad, a.k.a. your sweet parents, is allowed to gift £3,000 a year without the kids paying inheritance tax on it.
Most banks will accept a gifted or partly gifted deposit on a property. Parents may need to make a written statement confirming that the money is a true gift and that the money won’t need to be paid back. This statement ensures that the lender removes any repayments from their affordability calculations when creating the mortgage deal, giving the child more borrowing power for their dream home.
Let’s face it: most of us don’t have deep pockets with large amounts of spare cash to give away. However, some parents can loan money to their children with repayment in the future. Note: Consider the repayment terms carefully. If it’s too high, it could affect the youngster’s ability to get a mortgage.
Draw up a loan agreement that outlines the conditions and deadline for the full repayment (such as when the property is sold), as well as what happens if conditions change (e.g., if anyone involved in the mortgage passes away). A solicitor can help put this together. This will also need to be clearly disclosed when applying for a mortgage.
Parents over 55 that are asset-rich but cash-poor (e.g., own a property but don’t have any cash savings) can access the money tied up in their home, known as equity. A parent could release equity from their property to give their child cash as a sort of pre-inheritance.
It can be a complicated business, so always get financial advice and assistance.
A guarantor mortgage is an agreement between the buyer, the parents and the lender that if the buyer can’t pay the mortgage, the guarantor (parents) will pay it on their behalf.
Lifetime ISAs can be opened by anyone aged 18 to 39. Save up to £4,000 a year and the government will add 25% free. The money can only be used for a deposit on a first home or a pension. Early withdrawal for any other reason will be subject to charges.
For new builds, the government can help first-time buyers with up to 20% of the value of the property (up to 40% in London), interest-free for the first 5 years.
You buy a percentage of the property and pay the mortgage on it, then rent the rest from the local authority. You can then buy further chunks until you own the property outright.
In certain circumstances, parents can help by taking out a joint mortgage with their child. The parent will be equally liable for the repayment of the loan. The upside is that with two incomes, the child can be eligible for a larger loan and, therefore, a wider variety of homes.
A drawback to this option is the additional stamp duty rate. If the parent already owns a property, then their child’s new home would count as a second home, making them liable to a higher stamp duty charge (an additional 3%).
Another consideration with this plan is that when the parent’s second home (the joint one with their child) is sold, there may be capital gains tax (CGT) liabilities to pay.
Be sure to get the right financial advice before you make any decisions.
In any situation, anyone applying for a mortgage should make sure their credit score is in great condition. Lenders will look at each applicant’s credit report when deciding if they are a trustworthy customer. There are many steps you can take to get your credit score in good shape, such as paying bills on time and paying off debts.
Yes. Before parents get involved with their child’s house purchase, we strongly recommend obtaining independent financial advice. They can help you work out which route, if any, are appropriate and give you the full details of what to expect.
For many parents and grandparents today, they didn’t need to rely on financial help from their families to get onto the housing ladder. However, today’s youth often need a financial leg up if they want to stay out. Here’s why:
The average house price in the UK was £274,00 in January 2022, whereas in 1970, it was £3,920. While house prices have shot up, the average weekly wage has only crept up. All of this makes it harder for people of today on average wages to afford a home of their own.
The average student leaving university is about £35,000. Although student loan repayments are capped at 9% above £28,800, it is still money each month that previous generations would’ve put towards saving for a home.
The pandemic hit younger people’s income with the hospitality industry closing and firms laying off more inexperienced individuals.
Consider these options carefully and make sure you research your options thoroughly. We strongly advise seeking independent financial advice before you make a decision.
Now you know whether you’re ready to step onto the property ladder, are you ready to find a suitable home for sale? Our nifty tools help to refine your search so you can find suitable properties for sale that tick all your boxes.
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As a friendly reminder, this blog post is intended for educational purposes and should not be considered legal advice. For mortgage assistance, please reach out to an adviser. Your home may be repossessed if you do not keep up repayments on your mortgage.