Following the news that the ‘Bank of Mum & Dad’ is officially now the ninth biggest mortgage lender in the UK, Managing Director of Parsonage Financial Planning Flora Maudsley-Barton and Director Malcolm Wallace explain the importance of careful financial forecasting while taking a look at how helping a loved one on to the property ladder could really cost you.
With over 60% of under 35s seeking help from friends and family to purchase their first home, how can parents ensure that they are in a position to support their children whilst protecting their own assets in the long-run?
“It’s no secret that property prices are continuing to rise across the board, and it’s the seemingly unobtainable 10% deposit that keeps would-be first-time buyers off the property ladder and has spawned the modern ‘generation rent’. It is understandable that parents want to help where they can, but it is crucial that they are aware of how much they can afford to give and how best to gift money to ensure that both parties reap the benefits.
“Last year, a whopping £6.5b was loaned or gifted to those purchasing a property from friends or family, with parents torn between wanting to help out where they can without handing home-ownership over on a silver platter. This covers a range of family circumstances, with some able to pay forward the cost of a home to their children, while others are looking at loopholes which mean that cash is only parted with for a set period of time. With so many routes to take and options to consider, having a plan in place to guarantee a level of financial security to the next generation is essential and eliminates the risk of parents being left out of pocket later down the line.”
“At one end of the spectrum are the parents who are fortunate to be in a position to simply gift a property deposit (or even the entire value of the home) to their children, and though this may appear to be the most straight-forward answer for those who can afford it, there’s still lots to think about. For example, the mortgage lender will need proof in writing from the parent that the deposit was gifted (i.e., they won’t be asking for it back!), and if the parents’ assets are above a certain threshold, inheritance tax could be payable on the sum if either parent were to pass away within seven years. At this point, we also sit closely with our clients and make a full, detailed analysis of projected and predicted spending in the coming years to ensure that parting with a lump-sum of money now won’t affect them in the future.
“For parents with cash in savings that they can afford to part with in the short term, but may need access to further down the line, there’s a plethora of options available ranging from the likes of ‘Springboard Mortgages’ available from one of Britain’s leading multinational investment banks, whereby the 10% loan is released (with added interest) after 3 years right through to joint mortgages (shared between the parent and child). It’s worth bearing in mind that the higher the LTV (loan-to-value) on a home, often the higher the interest rate on the mortgage so here we’d recommend looking carefully at all of the available options before making an informed decision. This is where we work closely with clients to find the solution that best suits them and their financial decision, with typical charges being around 0.1% of the total loan, averaging £200 depending on individual circumstances.”
“Above all, we advise our clients who are looking to help out with getting their children on the property ladder to consider their own financial forecast, too – although gifting a lump-sum of cash may not feel like such a hit now, will this pocket of money be something you may need for yourself further down the line? For those with younger children, does it make sense to utilise efficient financial planning to prepare for such scenarios later in life?
“Wherever you may be in life and however your finances may sit, it’s always worth taking an objective look at your financial future to make sure that getting someone else on to the property ladder doesn’t see you fall further down the rungs. Although it may seem like a lot to take in, we would encourage anybody who is currently looking to purchase their first home to consider planning ahead for their own children, preparing for the future and alleviating any monetary concerns in the years to come.”
Your home may be repossessed if you do not keep up repayments on your mortgage.