Getting on the property ladder can be a challenging prospect; especially for first time buyers. It is becoming increasingly more apparent that people are receiving help getting on to the property ladder from the bank of mum and dad. It’s not just restricted to younger people and first time buyers however. Many adults also require help from the bank of mum and dad as well. This can come in the form of either a loan or a gifted deposit.
Some parents and grandparents feel that they could end up worse off as a result of helping out a loved one. It is highly recommended that you seek independent financial advice before helping out your children so you can gauge how much you can afford to give whilst still enjoying a good standard of living.
Using the bank of mum and dad to help buy a house will alter the usual process for your child. Here is the process:
- Notify your solicitor
- Provide evidence of loan or gift
- Sort out ID for both the parents and the buyers
- Proof of funds
- Address legalities with your solicitor
Pros and cons of using the Bank of Mum and Dad
- A tax free gift*
- Using the Bank of mum and dad for a sizable deposit means that the child will not need to borrow as much money. This could lead to lower interest rates.
- The possibility of a higher quality first home.
- An expanded variation of mortgage choices.
- If money is loaned instead of gifted, it will leave less mortgage options.
- Smaller savings for parents.
- The parents’ relationship status could change.
- You may need to relay more information regarding this to mortgage lenders, solicitors and estate agents.
Is there any tax to worry about?
Initially no, money gifted from the bank of mum and dad does not require any tax to be paid by either parent or child. However, later down the line, there could be an inheritance tax (IHT) bill due.
*£3000 is the maximum amount that a parent can give to their children each year without IHT being an issue. In addition, you can also carry over any money from the year prior as well. So if no money was given away the year before, you can give £6000. That means that two parents can give a combined total of £12,000. You can always give more than the maximum amount to a loved one but you will then have to be wary of the IHT.
Alternatives to the Bank of Mom and Dad
There may be a circumstance in which parents may not be able to use their funds to help out their children. There are several alternatives to using the bank of mum and dad which may make living life for the parents easier and less stressful.
Being a Guarantor
Though not all too common, guarantor mortgages are still a viable alternative to using the bank of mum and dad. The parent or close relative would have to act as a guarantor for up to 100% of the mortgage debt. This means that you will be agreeing to paying your child’s mortgage payments if for some particular reason your child is unable to pay. See more information on guarantors here:
Buy a property with your child
Taking out a joint mortgage with your child helps to alleviate the stress of your child having to pay their mortgage debts. One key benefit of taking out a joint mortgage is that if your child is also in work, with your combined incomes, you could afford to take out a larger loan.
However, if the parent is already in possession of another property, your child’s home would count as a second home. This would mean that there is an additional stamp duty of 3% to pay, making a potential investment more expensive.
Another drawback is that there may be capital gains tax (CGT) to pay. Capital gains tax is a tax on the profit that may come from an increase in value on the property. If the parent is still on the mortgage with their child when it eventually comes to selling the property, you are likely to have to pay CGT.
Some lenders may allow you to take on a joint mortgage and not have the parents name on the property deeds. This could be avoided though.
An offset mortgage is a mortgage which is linked to a savings account. Offset mortgages work by allowing parental savings to be offset against a family member’s mortgage. If you’ve got money set aside in a savings account it may not be earning much interest. So, it could be more beneficial to get an offset mortgage, and link the mortgage to this savings account. This could reduce the amount of interest your child or family member has to pay. One thing to note if you’re considering this is that you cannot access your savings until the term is up.
Help to Buy Schemes
Going through the help to buy scheme can also be another viable alternative to the bank of mum and dad. There are two schemes, one is a government scheme for help towards buying new property. The other scheme is related to pre-owned homes and is not backed by the government.
The government’s Help to Buy for new properties allows for a buyer to acquire a new home with just a 5% deposit. The buyer could receive an equity loan up to 20% of the new build’s value and for the first five years the loan is interest free. This could allow you to get much better interest rates when compared to offers on a 5% deposit.
In addition, there is Help to buy for pre-owned homes to also consider. There are a few differences to the government scheme when compared to this scheme. If you have a 5% deposit ready, you could borrow 25% towards your initial 5% deposit. Essentially, instead of a 5% deposit, you would have 30%. This could enable you to get a 70% loan to value mortgage (LTV), once again potentially saving you money in the form of interest repayments. This could take the need away from using the bank of mum and dad to help out with your first deposit.