Helping children to buy property

According to the Mortgage Advice Bureau, 84% of parents help their adult children buy property, making the "Bank of Mum and Dad" the 9th biggest lender in the UK. However, if you are planning to help your children with the purchase of their first property, you should know in advance what benefits and consequences this contribution may have not only on your finances but on those of your entire family.

It was believed that many young people find it challenging to pay the cash deposit due to the rising cost of living, inflation, and the high cost of real estate. However, a Legal and General’s Bank of Family Report shows that financial support from family members is expected to help fund nearly half of home purchases from buyers under the age of 55 this year. In the report, it is estimated that financial aid from families will support 318,400 UK property purchases by 2023, up from 225,400 in 2019.

Even adults in their 20s or 30s are seeking help from their families. Additionally, individuals who are 55 years old and purchasing their first home are also requesting financial aid from their parents.

Another recent report from Legal and General reveals that the “Bank of Mum and Dad” now contributes to 26% of funds to the UK housing market, with parents giving the amount for that first payment as either a gift (57%), a no-interest loan (18.3%) or one with interest (4.8%).

What is the bank of mum and dad?

The bank of mum and dad grew to prominence in the last decade, particularly due to the difficulties the current generation has to save large amounts of money compared to that of their parents. Sure enough, the “baby boomer” generation has done very well, having become a very wealthy generation due not only to profits from things like the defined pension salary scheme and house price increases in the past decades, for instance, but also from working hard and living frugally.

It is important to keep in mind that the current life expectancy in the UK is 80.9 years, meaning that the children of someone who passes after 80 are probably around 55, which is also the average age of inheritance according to the Office for National Statistics (ONS). At the same time, while one study from the ONS showed that adults in the UK expect to receive an inheritance of £132,000, the current average inheritance in the UK is around £11,000. Since many may need financial help before the inheritance age or may require a larger sum, considering gifting part of the inheritance earlier might be a great way to give them the support they need, and also avoid some inheritance taxes. 

There are several different ways in which parents can help, so it’s important to consider the advantages and disadvantages of each and take steps to avoid any misunderstandings that could cause family rifts.

Gifting money

The simplest and most common way for parents to help their children to buy a home is to give them the deposit money as a gift. The offspring can then arrange a mortgage knowing that the deposit is in place.

However, one of the most common issues that crop up when helping children out with their deposit is whether the money was in fact a gift or a loan. A gifted deposit must come with no obligation to repay the money. Misunderstandings over money can cause irreparable harm within a family, so it’s essential to communicate at every stage of the process, and wherever possible, to put the terms of any agreement in writing. 

Be aware of inheritance tax rules on gifts

To avoid paying inheritance tax, make sure you understand the tax implications of giving money to your children. There are strict limits to the amount of money you can give away as gifts to your inheritors, as making gifts reduces the potential inheritance tax due on your estate.

The IHT applies not only to cash but also to other assets, like cars and wedding gifts, so inform yourself about the limitations and the rules before deciding how you want to execute that gift.

As a rule, large sums of money gifted to a beneficiary takes seven years before it falls outside of your taxable estate. In other words, should you die within seven years of gifting the deposit, the gift could still be subject to inheritance tax, which your child will have to pay. This is just another good reason why you should keep written records of when the gift was made (so that HMRC can determine when the seven-year clock begins), and that your financial adviser or wealth manager is kept informed of your intentions.

Lending the money…

For those parents who feel uncomfortable with making a gift that won’t ever be repaid, lending the money is the second most popular option. Once again, it’s important to be very clear about the assistance that the “bank of mum and dad” is prepared to give.

If you’re offering a loan, you should clearly set out the loan repayment schedule, the repayment amounts, and the interest rate (if any) you expect your child to pay on top of the loan.

Of course, you can always choose to ‘write off’ the loan at a later date, or arrange for the loan amount to be deducted from their inheritance.

… might not be that easy 

Traditional mortgage brokers don’t really like the idea of potential customers borrowing money to fund their deposits, even if it is coming from the bank of mum and dad. From their perspective, this parental support should be considered as a loan on the mortgage application.

Some lenders won’t accept a mortgage application if it shows the borrower owes a large sum to their parents that needs to be repaid on top of their mortgage repayments. Those mortgage lenders that do allow borrowers to have other loans on their application may offer a smaller mortgage amount or higher borrowing costs.

So, it is important that you factor all of these issues in before drawing up a loan agreement for your child to sign.

Acting as mortgage guarantor

If neither of these options sounds appealing, or if you don’t have spare cash for a deposit, you might consider being named as the guarantor or co-signer on your adult child’s mortgage. This guarantee helps borrowers who may not have enough money to buy a property. They can borrow up to 100% of the property's value.

But signing on as mortgage guarantor is a big step, as should the buyer default on their mortgage repayments, you would be required to step in and, in the worst-case scenario, your own home would be at risk.

Taking on a joint mortgage

Another option for parents to explore is to apply for a joint mortgage on the property alongside their offspring. This is often used as a way to help children buy a more expensive property than they could afford on their own, as their parents’ earnings will also be taken into account by the lender when assessing affordability.

However, this is usually only an option where the parents are still working and earning a regular income. New mortgage rules may prevent some older parents from being able to get another mortgage. If the home is considered a second property, there may also be stamp duty implications.

Finally, parents also need to bear in mind that being named on a joint mortgage could affect their credit score, and affect their ability to get credit in the future, especially if their adult child has a poor credit history.

What else should parents be aware of?

The need for the bank of mum and dad isn’t going away any time soon. Offering financial assistance to your children can be an invaluable way of helping to set your children up for the future. But if you’re prepared to become a banking facility, you should make sure you do it as professionally as possible.

Like a bank keeping financial records, you should keep important documents to resolve disputes with your family or HMRC. This ensures that you are clear about your intentions and that everyone knows where they stand.

Before you make any promises to your children, we suggest you talk to an experienced and qualified professional to make sure raiding pensions and cash savings don’t leave you struggling to meet your own financial needs in the future. A financial adviser will be able to guide you through all these options, helping you choose the best one for you and your family.