The Bank of Mum and Dad is booming but it helps to do some homework before lending.
A growing number of first-time buyers and second-steppers are turning to their parents for help getting on to the property ladder.
Research earlier this year by Legal & General showed that more than a quarter of mortgages are now subsidised by the Bank of Mum and Dad. The average amount handed over is seven per cent of the purchase price, which averages at £17,500, and 57 per cent of parents gift, rather than loan, the cash.
However, if you’re planning to help your children with a property purchase, it helps to do some homework. Here’s what to consider:
*Before you agree to lend to would-be first-time buyers, make sure they have considered taking advantage of government schemes to maximise their deposit. The most generous by far is the Help to Buy ISA.
Under the scheme, first-time buyers can save up to £12,000 in the ISA and the government will top it up by 25 per cent. You can kick-start the ISA with a £1,000 lump sum, if you have it, and after that the maximum monthly amount you can save is £200, which attracts a £50 government top-up. The maximum bonus payable overall is £3,000. However, if a couple are saving together, they can open separate Help to Buy ISAs, which could bring the total amount of “free money” to £6,000.
To qualify for the 25 per cent extra, you need to have saved at least £1,600. There are no limits on how long an account can remain open but the government contribution to your mortgage deposit will only be paid to the lender when your home purchase completes. You are free to withdraw your own savings if you decide you don’t want to go ahead with the scheme.
The Help to Buy ISAs are available from a number of banks and building societies, which are offering interest rates of up to 2.27 per cent, which will add even more to your pot.
*Formalise your loan or gift. Set out a loan agreement with details of any interest payable plus a repayments schedule and formalise it with a promissory note. This is a written promise from a borrower to repay a sum of money to a lender. You can download the forms from websites such as LawDepot but the signatures should be witnessed by a solicitor. A solicitor can also provide a promissory note form for you, if required.
*Mortgage lenders prefer property deposit money to be a gift rather than a loan. If they are aware of a loan from the Bank of Mum and Dad they may refuse to lend.
*Be aware that any interest on a loan should be declared to HM Revenue & Customs, as it may be liable for taxation as income. Lenders must declare the interest on their self- assessment form as a taxable form of income.
*You can gift as much money as you like to your children without any tax implications. However, if you pass away within seven years of gifting the money there could be inheritance tax implications as it may be treated as part of your estate. If there are concerns over this and you have time to plan ahead, you can take advantage of rules that allow parents to gift their children £3,000 a year, which is protected from inheritance tax.
*A major concern for many parents is gifting money to a child who is buying a property with a partner/spouse. If the couple split up, your child’s partner could walk away with half of your cash. There are various ways to guard against this. You can ask the couple to have a declaration of trust prepared by lawyers. Signed by both parties, it sets out the share that each partner has in the property so when it is sold, your child will receive a higher share taking into account your financial gift.
You could also make the money a formal, interest-free loan secured against the property so that if the home is sold your money is automatically paid back to you.
Check the terms of the mortgage agreement as if the couple are joint tenants, the co-owner automatically inherits the other person’s share of the property on their death, regardless of any will. If they are tenants in common, the deceased’s share of the property will be disposed of according to the terms of their will and their final wishes.