Getting onto the property ladder isn’t easy, and many homebuyers look to their parents for financial assistance when purchasing their first home (and sometimes even their second or third!).
Naturally, most parents will want to do anything they can to help, but many aren’t in a position to simply gift a deposit. So, in today’s post, we’ll look at some alternate ways to help your child get onto the property ladder.
What is the Bank of Mum and Dad?
Before we get to the options available to parents who want to help their child buy property, let’s take a quick look at what Bank of Mum and Dad means and how important it has become in the UK property market.
Rather unsurprisingly, Bank of Mum and Dad (BoMaD) is an informal way of referring to parents who give their child financial assistance, and its usage is almost exclusive to the context of buying property.
What is surprising about BoMaD is how extensively it is employed. According to a paper produced by Legal & General back in 2020, 56% of all first-time buyers under 35 received financial support from their parents in order to get onto the property ladder. Across the year, £1.36bn in BoMaD contributions was made and almost three-quarters (71%) of those surveyed said that they would have been unlikely to buy without help.
This assistance aided an astonishing £18.11bn worth of property transactions.
However, it isn’t just the youngsters looking to Ma and Pa. L&G discovered that a further £2.14bn was borrowed by those aged 35 and over, which equated to BoMaD helping an extraordinary 101,800 transactions for the over-35s.
Perhaps the most remarkable figure in the report was that 9% of homebuyers aged over 55 said that their property purchase would have been delayed had they not received financial assistance from BoMaD. The Bank of Mum and Dad has truly become an integral part of the UK housing market.
How to help your child onto the property ladder
Now that we know what the Bank of Mum and Dad is and how important parents have been to the UK property market, let’s take a deep dive into the options mums and dads have at their disposal to help their children get on the housing ladder.
Give the gift of a property deposit
Probably the most obvious, and arguably most popular, method of financial assistance is a simple cash gift that will help raise the amount of deposit their child has available to them.
This can either be used as a way to reach the desired minimum deposit required to buy a home or further increase their borrowing power by lessening their loan to value, thus opening up better mortgage products with lower interest rates.
Lenders will generally accept a deposit that has been gifted, but you’ll often be required to formally confirm that this is the case. The reason for this is threefold: anti-money laundering, affordability, and ownership.
The first is pretty self-explanatory, but what about the other two?
If, for example, the deposit wasn’t gifted but loaned, the recipient would naturally need to repay the debt, which in turn could potentially affect their affordability calculations.
In terms of ownership, lenders want to know exactly who has a stake in the property. If you own part of the property alongside your child, it could affect the lender trying to sell the property should a repossession be made.
Most High Street lenders will have a gifted deposit declaration form you can fill out, but smaller banks and building societies may need a signed ‘Gifted Deposit Letter’ before they agree to lend. The letter will need to have the following details included in it:
- The name of the recipient
- The name of the donor
- The relationship between the two
- How much is being gifted
- Explicit confirmation that the funds are indeed a gift
- Confirmation that no repayments are expected or required
- Confirmation that no stake in the property will be received in exchange for the gift
- Evidence showing the donor is financially solvent
Do you need to pay tax on a gifted deposit
Neither the donor nor the recipient are required to pay tax on gifted deposits when the gift is given, but inheritance tax (IHT) can become due at a later date thanks to the seven-year rule.
If the donor were to die within seven years of giving the gift, you may have to pay inheritance tax on anything over and above the £325k threshold of their total estate. For the first three years, this will be charged at the full 40%.
There is a sliding scale in place, known as taper relief, which means that you’ll pay less in IHT once year 3 has been passed:
- 3 to 4 years - 32%
- 4 to 5 years - 24%
- 5 to 6 years - 16%
- 6 to 7 years - 8%
- 7 or more - 0%
Don’t forget your full annual inheritance tax allowance, which currently stands at £3k per year, and a year of which can be backdated to allow a £6k gift. This means that a joint gift given by both parents can amount to £12k tax-free, providing no other money was given in the last two years
Offer up a loan to get your child onto the property ladder
Let’s face it, for many of us, giving away thousands of pounds simply isn’t on the table…regardless of who the recipient is. Of course, we want to be able to do it, but reality is often quite different.
If you find yourself in this situation, you could consider loaning your child the money for a deposit instead. There are downsides to doing so, such as a reduced market when the time comes to shop around for a mortgage, but it’s still an option worth considering.
Setting up a loan agreement is simple enough. Things to include would be the interest rate, when the loan needs to be repaid, what happens if either party dies, what happens if the recipient defaults on their mortgage, and whether or not the loan can be repaid early.
Before you think otherwise, you definitely need to declare a borrowed deposit to lenders, as some won’t lend at all if this is the case. Even those that do will want to know, as it can affect affordability in the same way as we spoke about in the gifting section of this post.
Use your equity as security
Another option available to parents who want to help their child get onto the property ladder is to use some of the equity they may have built up in their own home. This, as the heading suggests, is a way of offering security to the lender.
In basic terms, your child could take out a 100% mortgage and you offer security against a portion of the loan both you and the lender agree on. Providing your child keeps up their repayments, this method won’t cost you a penny, but there are serious implications if they don’t.
Failing to meet the required repayments will make you liable for the agreed percentage of the loan. If you can’t meet this, you may be forced into selling your property in order to pay it off, as you have used the equity as security instead of cold hard cash.
Think very carefully before going down this avenue.
Take out a family offset mortgage
Family offset mortgages work in a very similar way to equity as security, but you’ll use savings instead of the money you have built up in your own property. For an in depth look at this specialised mortgage product, take a look at this post next: What Is A Family Offset Mortgage?
Become a guarantor
While we’re on the subject of specialised mortgage products, a guarantor mortgage is another route you could take to help your child onto the housing ladder.
These work exactly as their name suggests: You guarantee to cover the mortgage payments if your child cannot keep up with them. This means you’ll be liable for the whole of the mortgage debt should your child default.
Guarantor mortgages are quite hard to come by, but they are out there. Speak to a mortgage broker to discuss the best possible loan for your own individual requirements.
Buy the property together
Our final method is to simply take out a joint mortgage with your child and buy the property together as tenants in common. This option, like all the others, has its pros and cons.
On the plus side, pooling your resources into one could mean a better loan and preferable interest rates, or even a larger mortgage for a better property. The downside, however, may outweigh these positives.
Buying a second home means you’ll be liable for an additional stamp duty charge, which currently stands at 3% for those buying a second property. Not only that, if your name is still on the loan when the home is sold, you may be liable for Capital Gains Tax as well.
A few mortgage providers may lend to you without adding your name to the deeds, which creates a loophole worth investigating. Again, speaking with a reputable mortgage broker will help steer you in the right direction.
That’s it for another week, we hope you found it useful. Want more like this in your inbox (alongside a selection of our latest properties) every Monday? Sign up to our newsletter and we’ll add you to our growing list of subscribers.
If you’re looking to buy your first home in or around the capital, we can help. Petty’s have been making people’s property dreams come true since 1908, and our family run company is one of the oldest estate agencies in East London. We’ve helped untold families and individuals move home over the years and we’d love to assist you, too.
Give our friendly sales team a call today to find out exactly what makes Petty Son and Prestwich different.