5 things you need to know if you want to help your child buy a house
With news this week that the ‘Bank of Mum and Dad’ is predicted to lend £6.3 billion this year, we look at what you need to know if you want to help your children get on the property ladder
June 19, 2019
The ‘Bank of Mum and Dad’ is predicted to lend £6.3 billion this year according to research by Legal and General, moving it up the rankings to become the UK’s 11th biggest lender.
Parents are digging even deeper with an average contribution of £24,100 this year, compared to £18,000 last year. And the results show that the Bank of Mum and Dad now accounts for nearly one in five transactions in the UK mortgage market.
What’s more, despite lower market transactions overall this year, the Bank of Mum has supported 259,400 transactions that’s more than the 210,964 transactions supported by the Help to Buy scheme in the five years since it’s launch.
It’s no surprise the Bank of Mum and Dad plays such a significant role when you look at how home values have been rising by more than the rate of growth in earnings over the past three years making it even harder for first time buyers to save a deposit.
But before you start reaching for the cheque book, here’s what you need to know:
1. Get expert advice
If you are thinking of helping your child to buy a home then it’s essential you think it through carefully. It’s crucial you make the right decision for you and avoid eroding your finances in a way that impacts on your financial stability in later life.
We would strongly advise you get independent financial advice before getting involved in helping your child onto the property ladder. An IFA can help you work out exactly how much assistance you can afford to give.
2. You have options
You may think the only way you can help your child is by giving a cash gift. And while that is what happens in the majority of cases, there are different methods too.
- Loans: If you have a lump sum but you can’t afford to gift it, you can loan it. You will need to draw up a loan agreement which sets out any interest being paid and when the money needs to be repaid.
- Equity as security: You can use a portion of the equity in your home as additional security against the loan. However, if your child is unable to keep up with repayments and defaults on the mortgage you would be liable for a portion of the loan.
- Savings as security: With Family Offset Mortgages, your savings can be offset against a child or family member’s mortgage. Read more in our guide to offset mortgages.
- Guarantor mortgages: With these products, you as a parent, or a close relative, act as a guarantor for 100 per cent of the mortgage debt. So you are essentially agreeing to cover the mortgage payments if your child doesn’t.
- Buy a property with your child: You could take out a joint mortgage with your child, making you equally liable for the repayment of the loan. However there are drawbacks like the additional stamp duty rate which would be payable if you already own a home.
3. Your child could get an inheritance tax bill
When you gift your child cash, they won’t have to pay tax immediately. And you won’t pay any tax on the gift either.
But it’s possible that in the future, your child could be hit with an inheritance tax bill.
Everyone is allowed to give up to £3,000 a year away, and it is immediately exempt from inheritance tax. And you can carry over any unused allowance from the previous year.
So, you and your partner could gift your child £12,000 without inheritance tax being a problem if you hadn’t gifted any other money to anyone in the previous two years.
However, if you want to gift more than that, or don’t have your full annual inheritance tax allowance, the money could be liable for inheritance tax.
This is because if the person gifting the sum dies within seven years it would still be classed as part of their estate for inheritance tax purposes.
So if their total estate, including the gift, is worth more than £325,000 then up to 40% tax could be due on the excess.
4. Loaning money could affect your child’s ability to get a mortgage
Most banks will accept a deposit that has been gifted (or partly gifted). Although they may ask for written confirmation from you stating it is a true gift.
However, if you loan the money instead, this could have major implications for your child’s mortgage. This is because a loan could affect mortgage affordability calculations as lenders will factor repayments on the loan into the child’s outgoings.
Also, some banks will not accept a borrowed deposit. This is because the money comes with strings attached. It will limit the number of deals your child will be able to apply for.
5. You can protect the money you gift
If your child is buying a home with their partner, you can protect the money you give them for a deposit in case they split up, with a declaration of trust, or deed of trust.
You can ask the solicitor working on the property purchase to do this for you. It states who the money was gifted to. This means you can specify you gave the money to your child and not to them and their partner.
If your child’s relationship breaks down, your child will then retain ownership of your financial gift. However, if your child later marries the person they bought the property with this could affect the deed of trust.