Parents are predicted to lend more than £6.5bn* in 2017 to help their children step onto the property ladder as first-time buyers continue to struggle to afford homes. This is a mighty 30% increase on the £5bn which was loaned last year, and means that that rather generous combined “Bank of Mum & Dad” lends a similar amount to the Yorkshire Building Society, the country’s ninth-biggest mortgage lender!
Here in Wales, parents make the lowest contribution at £12,500, whereas in London the average parental contribution per transaction stands at circa £30,000, with the national average at £21,600 (up from £17,000 the previous year). Unsurprisingly, millennials are the biggest recipients, with 79% of the funding going to new buyers under 30.
So why is it that parents are now involved in more than 25% of all UK property transactions?
Nigel Wilson, the Chief Exec of Legal & General, who compiled the report along with economics consultancy CEBR (Centre for Economics and Business Research) points to “intergenerational inequality”, citing the difference in opportunities experienced between millennials and baby boomers – the former missing out on free university education, defined benefit pensions and affordable housing. On the latter point, says Wilson “Parents want to help their kids get on in life, and the bank of mum and dad is a testament to their generosity, but it is also a symptom of our broken housing market”
In other words, we are simply not building enough houses to keep pace with demand, not just for the young but for families and the older generation alike, meaning that there is just not enough stock to go around – which pushes up rental prices, leaving less spare cash for deposits.
The situation is neither equitable nor sustainable – especially given the fact that the older generation is witnessing better health and longer life expectancy, meaning that the pot of pennies they have saved during their working lifetime has to stretch that much further.
We can’t solve the UK housing crisis here, but we can give a few pointers to those who are hoping to help their children out of the family nest and into their first home…
If you want to help your kids out financially, the first thing you need to determine is, do you have sufficient savings or investments to cash in, or will you need to borrow money against your home or other assets?
Some parents may look to release equity in their property by remortgaging, but if you don’t want to switch your current deal, you could get a loan secured on your home instead. Alternatively some equity release schemes allow you to borrow money against your home, with the capital and interest repaid being after your death or when the property is sold – these are however usually targeted at older homeowners who would struggle to take on a regular mortgage and probably have little or no income to make regular repayments. Be careful here however – as there are no monthly repayments, the interest “rolls up”, and this compounding effect will quickly increase the amount you owe. Figures from the Money Advice Service show that a £45,000 loan taken out at a rate of 5% will have grown to £152,387 after 25 years.
Some mortgage lenders offer products which allow parents to offset their savings against the child’s mortgage, meaning they qualify for a much cheaper deal. The Barclays Family Springboard Mortgage allows first-time buyers to purchase a property with just a 5% deposit – the parent then deposits 10% of the purchase price in a Barclays Helpful Start account where it stays for three years, after which they get their savings back – with interest – assuming certain conditions have been met. At the time of writing, this product is significantly cheaper than any mainstream mortgage that you could obtain with a 5% deposit.
Be aware that if you gift money, there can be Inheritance Tax (IHT) consequences if a person’s estate is worth more than £325,000 when they die. However, a new rule introduced this current tax year means someone can pass on an additional £100,000 if they’re leaving property to a family member, rising to £175,000 by 2020. The donor must however live for seven years after giving the gift for the amount to be exempt of IHT (Any gifts made less than seven years before death count towards the threshold)
Some gifts are exempt from IHT – for example individuals can give £3,000 away each year with no IHT implications, with leftover annual exemption can also be carried over from one tax year to the next to a maximum of £6,000. You can give away more if the recipient is getting married or entering a civil partnership – £5,000 if it’s your child, £2,500 if it’s a grandchild or great-grandchild, and £1,000 for anyone else.
Some parents may prefer to lend their children money, with it being paid back monthly or at some point in the future e.g. when the property is sold, In such circumstances, ensure a simple loan document is drawn up which stipulates any interest payable and the repayment schedule. The document should be signed by both parties and set out what happens if one of the parties dies, or if the parent needs the money back.
It’s also worth noting that if your child is buying a property, any such parental loan agreement would still need to be disclosed to the mortgage lender as part of the affordability assessment.
Guarantor and joint mortgages
A way to assist without immediately handing over cash is to act as a guarantor, meaning that the parents income is taken into account when agreeing a mortgage deal,
This typically means the buyer can borrow more, but of course it ties the parent into covering the child’s mortgage payments if they were unable or unwilling to do so – so be sure that this is an affordable option before you commit, however improbable it may seem at the time that your child would default.
Another option is for parents and children to take out a joint mortgage on a property, where the parent would be jointly liable for mortgage repayments but legally own a share of the property.
As with all financial matters, we recommend you take expert advice before proceeding – please contact the office where we can assist with all IHT and other taxation queries, or put you in touch with one of our recommended financial advisors regarding mortgage and savings products.