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Bank of Mum and Dad: how to help your children on the property ladder

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07/12/2017
Parents are set to lend £6.5bn to their children in 2017, making the Bank of Mum and Dad the UK’s 9th largest mortgage lender, research has found.

Around 29% of the 650,000+ first-time buyers each year have help from family and friends when buying property. Around two-thirds of those said they wouldn’t have been able to buy without this help.

Five ways parents can help their children

Parents considering gifting money for a house deposit to their kids have various options. According to trends, about two-thirds of all first-time buyers in the UK pay a deposit of up to 20% of the purchase price, and this is nearly £50,000 higher in London. London estate agent Douglas and Gordon gives its tips on how parents can help out.

Equity Release

According to research, one in 79 homeowners in Britain is now considered a millionaire due to surging house prices. That means the number of people sitting on equity they can use to help their kids has increased. Many parents are unlocking cash on their own properties to help their kids buy theirs. The two main equity release options include:

  • Lifetime mortgage – a popular option which means that parents don’t have to make any repayments while they’re alive. Interest is simply added to the loan, which is repaid when the home is eventually sold. This enables withdrawals of small sums of cash or one large lump sum.
  • Home reversion – a less popular option that enables parents to sell some of or their entire home to a reversion provider and receive between 20 and 60% of the market value in one lump sum, or in regular payments.

As with any loan, there are various factors to consider, such as arrangement fees, the amount of interest and how it will impact inheritance, early repayment charges, and the effect that releasing equity could have on retirement plans.

Downsizing

Parents considering downsizing are less concerned with property size and more concerned with suitability. As a result, many homeowners are looking to this method as a way of helping their kids get onto the property ladder.

The Retirement Confidence Index shows that 48% of pensioners are considering moving to smaller homes or would be encouraged to do so with a stamp duty exception. By 2036, the estimated equity release via downsizing could total £877bn.

Gifting money for a house deposit

The data found that 56% of parents choose to gift money for a house deposit, while 21% provide it as an interest-free loan and 2% offer it as a loan with interest.

When gifting money to children for a house deposit, inheritance tax (IHT) needs to be taken into account. Donors must live for seven years after giving the gift to remain exempt from IHT, however there are strict rules on the size of monetary gifts that can be given in a lifetime and careful planning is required to ensure that children get the most value from this kind of help.

Usually, parents will be required to sign a ‘gift of deposit’ form which confirms the details of the gift and waivers any rights to the property being purchased.

Lending money

When providing money as a loan, mortgage lenders need to be made aware of the terms of repayment as this impacts the overall affordability of buying a home.

Parents and children are required to draw up a document which details a repayment schedule including interest payable, as well as what will happen in the event of a death.

Guarantor Mortgages

When applying for a standard mortgage, parents can help their kids borrow more by standing as a guarantor, enabling their income to be considered. This also makes them liable for repayments or outstanding debt should any difficulties occur.

The most important thing for parents to consider when providing this kind of support is whether they’d be able to cover the full cost of the repayments if the need arose.

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