Becoming the Bank of Mum & Dad
It has been predicted that parents are to lend their children more than £6.6bn this year in order to help them get a foot on the property ladder; according to recent research from Legal & General and economic consultancy Cebr.
This makes the Bank of Mum & Dad the 10th biggest mortgage lender in the UK. So, for any parents or grandparents who are thinking of helping their children buy their first property here’s a guide of points to consider from KDW Financial Planning….
How much can you afford?
As a parent we all want to help our children as much as possible however it is important to be realistic about how much you can afford to help them. You may choose to cash in savings or investments that you hold.
However, many parents are increasingly borrowing against their home in order to help their children. There are several ways in which you can do so.
Equity Release
Parents aged 55 and over will be eligible to use Equity Release to remove a lump sum from their property. Equity Release allows you to remain in your property until you die however it is important to realise that it will impact the amount of inheritance you leave behind for your family. You will be required to consult an independent financial adviser before taking out an Equity Release product.
Remortgage
For those parents who are younger than 55 or who feel that Equity Release isn’t the best option for them, can look to remortgage their home. This would increase the total amount of borrowing releasing equity that can be used as a deposit towards your child’s home.
Downsize
As your children leave home you may feel that the family home is now too big, some parents are turning this into an advantage by downsizing their property and using the funds to help their child out with a deposit.
Gifting a deposit
Some parents may gift their children with a deposit meaning they do not expect to be paid the money back.
This can be a benefit with inheritance tax planning; if an individual’s estate is worth over £325,000 or £650,000 for a couple it will be subject to 40% inheritance tax. The new residence nil rate band allows for each individual to offset an additional £100,000 from the sale of a family home. Removing a sum of money from your estate and gifting it to your child could reduce your inheritance tax liability. However, it is important to bear in mind that if you pass away within 7 years of the gift being made it will still be subject to inheritance tax.
There is also an exemption with inheritance tax, which allows you to gift £3,000 per tax year to an individual without it being liable to inheritance tax. If you do not give £3,000 in one tax year you are able to give £6,000 the following year. This could be a way of helping your child with their own saving efforts by topping up their own savings over a period of time.
Lending a deposit
Another option for parents is to loan the funds rather than gift them. This will mean that the child needs to pay back their parents, this could either be in monthly instalments or in a lump sum some years down the line when the property is sold.
We would recommend both parents and children draw up and sign a loan document which sets out how much is being lent to the child, the repayment schedule and any interest that will be accrued. The loan document should also cover what should happen if one of the parties were to pass away. This loan document will need to be disclosed to the mortgage lender as it will have an impact on the way the affordability of the mortgage is assessed.
Become a Guarantor
As a guarantor of your child’s mortgage you are taking part of the responsibility for the mortgage to give the lender confidence that the loan will be repaid in full and on time.
You can specify when becoming the guarantor that you are only guaranteeing a set amount. For example, if your child is able to borrow £200,000 but the property they wish to purchase is £250,000 you may act as guarantor for the additional £50,000 only.
If your child fails to pay up then the bank will pursue you to settle up any outstanding debts.
Joint Mortgages
Entering into a joint mortgage works fairly similarly to becoming a guarantor in that you are partly liable for any missed payments; it differs because you actually own a percentage of a property. Many lenders have introduced specifically designed products for the purpose of helping their child onto the property ladder and have features such as protecting parents from being liable for stamp duty.
Protecting the gift
A major concern for many parents is what will happen to the gifted deposit if their child and partner, who they are buying the property with, split up. Parents that would like to ensure that the gift remains with their child, instead of split between both parties, may wish to consider entering into a formal Declaration of Trust.
A Declaration of Trust, also known as a Deed of Trust, will outline how much money each party originally invested into the property and how the proceeds of a sale should be split.
By using a Declaration of Trust a gifted deposit can be ‘ring fenced’ so that in the event of a sale of the Property the gift will be returned to the original party in full.
From this article, you can see there are many ways that you can help your child to become a home owner. Take the time to review the options taking into the account the pros and cons of each options. A mortage adviser can help you weigh up the benefits and risks for both you and your child ensuring your continued financial stability.
If you would like to discuss your options please do not hesitate to contact the team at KDW Financial Planning, based in St Albans, Hertfordshire.
T: 01727 85 22 99 | E: mail@kdw.co.uk | www.kdw.co.uk