The Bank of Mum and Dad is one of the UK's biggest mortgage lenders but how does it really work?
With the next generation still struggling to afford a place of their own, it’s only natural for parents to want to help where they can by providing some financial assistance. Whilst this is great for their kids, it's really important parents understand the implications. Financial help can be a legal minefield and protecting family assets in the face of unexpected life events is incredibly important. It could also have a big impact on their savings, retirement planning or even day-to-day lifestyle.
Gifts and loans from parents to their children to help them onto the property ladder totalled £8.8bn in 2022. This amount has increased by almost £4bn since the start of the pandemic in 2019 as a result of a more stringent mortgage market and higher deposit requirements. Higher mortgage rates and the end of the Help to Buy scheme will only increase lending from the Bank of Mum and Dad.
If this is something that you are thinking of, it's likely that some Important questions will arise. Is the financial assistance a gift or a loan? If it’s a loan, are there any strings attached? What are the implications if a parent’s name appears on the deeds of the property? If it’s a gift, how should it be treated if it’s given to only one member of a couple?
A gift is generally the first option parents consider when a child needs help to buy their home. In many ways it's the simplest. The parent gives their child a sum of money to act as a deposit to allow them to purchase. As long as the child's mortgage lender has written confirmation of this, and there is no expectation that the parent wants the money back then the process is complete. Depending on the size of the sum likely to be involved and the fact that such arrangements could be scrutinised by HMRC or other third parties in the future, it’s always best to document gifts and to keep such paperwork in a safe place or with your solicitor.
An alternative to an outright gift is to make a loan. Under these circumstances it needs to be very clear what the expectations are around when it is to be repaid. The safest way to do this is via a solicitor who will draw up a contract detailing how the loan is to be repaid and by when. Another point to think about is if you'd be prepared to write the loan off in the future, and under what circumstances? Loans will be looked at by the mortgage provider when assessing suitability and be viewed as an outstanding debt alongside the mortgage being borrowed. Some mortgage lenders may decline a mortgage application where the money loaned is going towards the deposit, however a loan could be used to help with other costs associated with buying a house such as stamp duty or legal fees.
The parent can act as “Guarantor” for the mortgage which means that in the event of non-payment the parent(s) becomes liable for the mortgage payment, or settlement of the mortgage. However, you would not need to act as guarantors for the entire term of the mortgage loan. As soon as the affordability criteria have been met, by salary increase for example, the lender could remove the parent(s) from the loan thereby freeing them from any ongoing liability.
Taking out a Joint Mortgage is another option. Whichever parent has the highest income, could take out a joint mortgage with the child using their income to improve affordability. This is generally not a first choice as there are additional costs involved. If going down this route you may want to consider the tax implications of Stamp Duty Land Tax and Capital Gains Tax.
Whether you wish to help your children out, or feel that they need to exert their financial independence, we encourage you to ensure that any decision that you make is well researched. Speaking with a solicitor, and financial advisor, will help ensure that you can make the right decision for your circumstances. To discuss suitable properties, or questions about the property market call us at Bartlett & Partners on 020 8614 1441
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