If you’re a parent or grandparent looking to help your offspring get onto the property ladder through financial gifts or loans, you’re not alone.
Faced with high rental costs and soaring property prices, more people are dipping into savings, releasing capital from property, or even taking out loans to support the next generation of homeowners.
But with increasing life expectancy meaning our retirement savings need to last us longer, can you afford to deplete your own financial security to prop up that of your children?
Research by Legal & General estimates that £6.3bn was provided last year by the Bank of Mum and Dad – or BoMaD – as it’s known, effectively making BoMaD the 10th largest mortgage lender in the UK.
The average family contribution in the UK is now £24,100, £6,000 more than the previous year, with Yorkshire and Humber figures standing at £17,200.
This may be used to top up a deposit, to boost borrowing power, or access cheaper mortgage deals.
But BoMaD doesn’t behave like other banks or mortgage lenders, rarely keeping a record or written agreement. Would your high street lender hand over thousands of pounds in cash without so much as a signature?
Parents who bankroll their children are being urged to adopt a more professional approach to ensure both parties are on the same page.
One in five people who have recently bought a house have relied on parents or family to do so, rising to one in three of those who expect to buy a house in the next five years.
Although it is primarily younger people who struggle to get out of ‘generation rent’, with 62 percent of under 35s needing family aid to buy their first home, Legal & General found that dependency on parents lasts well into mid-life, with two-thirds of those aged 35 to 44 and a fifth of 45 to 54-year-old homeowners having relied on BoMaD to purchase a property.
When the money was handed over, almost two thirds received it as a gift with no requirement to pay it back, and 14 percent received a mix of gift and loan. Only six percent were charged interest and only eight percent of those doing the lending wanted an equity stake in return for their contribution.
Financial Gifts vs Loans
Most banks or mortgage lenders accept gifts but may ask for written confirmation as to where the money came from.
There is no immediate tax paid by either party on gifts, but you may have to pay inheritance tax if the lender dies within seven years of the gift. Financial gifts can also reduce your estate meaning you’ll pay less IHT overall.
Financial gifts are the most common way to help but due to the amount of money gifted, documentation is always recommended.
For inheritance tax planning purposes, documentation to support when the money was paid and confirming that it was made with the intention of being a gift may be crucial, if it is to take advantage of the rules concerning such gifts when inheritance tax is calculated on the death of the giver.
If you give money as a loan and expect repayment either monthly or on the sale of the house, this must be declared to a mortgage provider. As another outgoing, loans may affect affordability and could reduce the amount of mortgage deals available to your children.
Ask your solicitor to draw up a loan agreement which covers the payment terms, length of loan and any interest. A loan agreement should also stipulate what happens if the property is repossessed or if either party dies to protect your funds.
Other ways to help
Of course, not everyone is fortunate to have a sizeable nest egg to help their children and some 14 percent have downsized and four percent re-mortgaged to use equity to fund their son or daughter’s new home.
Others may choose to use their equity or savings as security on their child’s mortgage through the likes of family offset mortgages. But these come with drawbacks including not being able to touch your savings for the duration of the mortgage.
Some parents become guarantors where they cover the debt if their children don’t make the repayments, while others take out a joint mortgage where both parties are equally liable. This will also prove costly as, if you already have property, you will pay Stamp Duty and Capital Gains Tax on purchase and future sale.
Whichever route you choose to go down, if your child is buying a property with a partner or friend, it is wise to draw up a Declaration of Trust which dictates who the money was gifted or loaned to in case of a relationship breakdown. This may alter with marriage, but a prenuptial agreement and updated Will can help retain ownership should you choose to ensure your contributions stay within the family during divorce settlements.
Whether to avoid later disputes, or simply to resolve any unclear thinking at the time, makes it vital to have a written record of what was intended.
While the cost of preparing such agreements may seem unnecessary in the happy situation of handing over the cheque to help children onto the property ladder, the potential costs of litigation further down the line can be considerably more than the original loan.
The sums involved, and the complexity of property purchases, make it essential to get the right advice.
None of the Top Ten mortgage lenders would hand over the cash without having their interests properly protected and the BoMaD need to take the same approach.
Before you open your branch of BoMaD, ask yourself:
- Can I afford it?
- What can I afford to lose?
- What will happen if loan repayments are missed?
- Is my spouse/partner in agreement if using joint funds?
- If I have other children, can I afford to help them too or will this cause family fractions?
With over a quarter of BoMaD lenders not confident they will be able to afford their own retirement after helping their children and six percent postponing retirement, parents need to weigh up all options before handing over the cash.
*This is not legal advice; it is intended to provide information of general interest about current legal issues.