Opening a ‘branch’ of the Bank of Mum and Dad
Many parents are always willing to give their children a helping hand in life. This extends from help with their school work to helping them out financially when they are looking for big ticket purchases. And there are none bigger than buying a first home.
If you are considering helping your child to buy their first home, we have put together a list of things that you should consider before taking the plunge.
First, can you afford it? According to recent research, over one third of respondents to a survey said they can’t and another third said they have not and do not intend to offer financial support to children and grandchildren to help them get on the property ladder.
Terms and conditions
Assuming you can afford it, and are keen to help, you need to decide whether your financial assistance will be a loan or a gift. A Royal London survey found that over half (57 per cent) said the money should be a gift that doesn’t need to be repaid. A further 27 per cent of respondents said the money would be an advance on inheritance. Only 15 per cent said they expected the money to be repaid.
Clarity at the start of the arrangement as to whether help is a gift or a loan is essential. Also, the young homebuyer may want to consider a written agreement with their partner about the financing of the home.
Most parents tend to provide sums of £10,000 or less. This tends to be the most popular range of funding and would usually go towards a deposit for a new home.
The next most popular range of funding is between £10,000 and £20,000 to family members. In some cases, people may plan to provide more than £50,000 to children and grandchildren.
Regardless of the amount, parents need to be aware of a wide range of unexpected costs and risks when helping their children with a house deposit.
There are five things to consider before 'opening a branch’. Here are a range of issues which parents need to consider and some of the pitfalls that they need to be aware of.
Taxation: If parents are named on the deeds to a property purchased with a child they could be liable for the higher rate of stamp duty which applies to the purchase of second homes. They could also find themselves with a capital gains tax bill should the property be sold at a profit later. Conversely, gifts towards a deposit can still count towards a parent’s estate for inheritance tax purposes if they die within seven years of giving the money.
Future financial hardship of parent or child: Parents can hand over what they believe is an affordable amount only to find their own circumstances change due to redundancy or ill health and they find themselves short of money. Similarly, children may initially be able to make repayments of a loan to parents only to find that it becomes a struggle once they have children or face unemployment or sickness absence.
Impact of falling house prices: Even after several years of strong house price growth parents must consider their position in the event of the property needing to be sold after a housing market crash. If the property is in 'negative equity', then parents may not see their money returned when they expected.
Relationship changes: Parents will want to help their own children but may want to think what would happen if their child forms a new relationship or an existing relationship breaks down - could there be a dispute about how much of the house is owned by each party?
There are other ways that parents can help their children on to the property ladder:
- Acting as guarantors on the mortgage using the equity on their own home, or placing money on deposit with the lender to provide a guarantee that mortgage payments will be kept up.
- Raising funds on their own home through a second mortgage or equity release.
- Providing funds for their son or daughter to open a Lifetime ISA, benefiting from a government top-up of 25%.
The Royal London has a handy guide for anyone considering opening the Bank of Mum and Dad. You can find it here.