First-time buyers often face many significant hurdles when buying a home, but more significantly recently. With the average house price rising, along with bills, rent, and just the general cost of living, saving a deposit for a home is now an impossible task. It is no surprise that many first time buyers are turning to the “Bank of Mum and Dad”.
Loans from The Bank of Mum and Dad have been crucial for this generation of adults trying to get on the property ladder.
A recent report from Legal and General revealed that 49% of those under 35 have to borrow from the bank of Mum and Dad when buying a property. Without this financial help most buyers would not be able to get on the property ladder.
What is the “Bank of Mum and Dad”?
If the Bank of Mum and Dad was a physical bank, it would be the 9th biggest lender. However, it may seem like a great idea to go to the bank of Mum and Dad, there are a set of procedures to get this money, especially when it’s gifted.
How can I help my child buy a home?
There are a few ways that parents can help their children buy their first home:
- A financial gift or gifted deposit
- A loan
- Linking your savings account
- Acting as a guarantor on their mortgage
- Getting a joint mortgage
What is a financial gift?
The main difference between loaned money and gifted, is that gifted money doesn’t have to be paid back.
Mortgage lenders do prefer a financial gift over parents loaning money, and all you have to do is ask your parents to write a letter detailing the amount they’re gifting to you for your mortgage lender.
There are a couple reasons for why mortgage lenders ask for written proof for the gifted money. Firstly, for affordability calculations, they have to know that this money isn’t a loan and wont require regular repayments towards your mortgage.
Secondly, if implications arose and your home had to be repossessed, they need to know that you don’t have any interest in the property.
If your parents however would prefer to loan you the money, meaning you have to pay it back, then your mortgage broker will take these payments into consideration when calculating how much you will be repaying in total.
Are there any tax implications to gifting money?
Children who are gifted money from the Bank of Mum and Dad don’t have to pay any immediate tax on the gift, and the parent wont have to pay any tax either.
With that being said its important to note that possibly down the road an inheritance tax bill may be due. Everyone is allowed to gift up to £3,000 a year which is exempt from inheritance tax, and any unused allowance from the previous year can be carried over.
This means that each parent could gift their child £12,000 a year without tax becoming a problem, especially if they haven’t supported any other children with money in the previous two years.
If you want to gift your child more than stated above, or don’t have your full inheritance tax then the money you are gifting could be liable for tax.
Your parents or another family member can act as a guarantor on your mortgage. This is often a great option for those looking to buy their first home, as your guarantors income is also taken into account on the application for your mortgage.
By taking a guarantors income into consideration on an application means you may be able to borrow more than if it was an individual income. However, if you were unable to make the payments, your guarantor would have to make the payments on your behalf.
Therefore, when choosing a guarantor please ensure that they are able to pay for all their own personal commitments, as well as your mortgage repayments if there happened to be any problems with payment.
Getting a loan from your parents
It is straightforward to write up a loan agreement from the Bank of Mum and Dad. This agreement should include the amount of interest that should be paid on the loan after buying the property, and when the repayments should be made.
The loan agreement should also include any future problems that may arise, such as if anyone involved in the loan was to die it if the parents need the money back.
If a mortgage lender was to be involved in this process of getting a property, the loan from the Bank of Mum and Dad would have to be declared in the application.
Getting a loan could have major implications when it comes to buying a property for the first time. The calculations for affordability on the mortgage will be affected as the lender will have to take the loan repayments onto the outgoings of the child.
However, a loan or borrowed deposit could limit the number of deals your child may be offered as it comes with strings attached.
The right approach
When accepting money as a loan or a gift you may find it can get a bit tricky for both parties involved, especially if the parents feel they have to help out their family to make sacrifices in their life to do so. Children may also feel like they are in debt to parents after receiving the gift or loan, and therefore can cause a strain on the relationship.
When it comes to arrangements with money it is best to be clear about what both parties would like out of this agreement. Is the money gifted or is it a loan? If it is a financial gift to help buy a home, it is important that both parties acknowledge this. The same for a loan, there must be some agreement, whether formal or informal about how the financial support will be repaid.
Most families do take a more informal approach to money lending, but taking up legal advice can often be a great idea.
There are a few things to do when getting help from the Bank of Mum and Dad;
Inform your conveyancer:
As soon as your mortgage offer is accepted, make sure your conveyancer is aware that some or all of your deposit is a gift
Provide evidence of the gifted money, to prove its not a loan
When receiving gifted money, the lender will need a written letter of consent. This is often as a letter of part of the form itself. The letter confirms that the money was a gift and the person giving has no interest in the property themselves.
Ensure you have identification:
Make sure you have the right proof of identification, photocopies of ID will not be accepted by a solicitor, so you must ensure you have the right identification for the application. This may be problematic if the person giving the gift is overseas or unavailable.
Have your bank statements ready:
Part of the application process includes anti-money laundering checks. This includes checking bank details of the gift giver as well as the recipient, to prove the money was earned legitimately.
Understand what a gifted deposit means for your personal circumstances:
If you are giving the money to a child or other relative, you must be aware that once the process is complete, you no longer have rights to the money given or the property the money went towards.
What if you have no written agreement?
If you have no legal agreement and legal action is taken in the future, the court may decide the payment was a gift and repayment may not be an option.
Similarly, if the payment has been recognised as a loan, there could be complications if you try to recover possession or payment of the property, due to the Consumer Credit Act 1974.
Be aware that gifting money isn’t as simple as transferring payments into a bank account, there is a process that needs to be followed, this is especially important to make both parties aware of possible tax implications that are involved in gifting money.
Purchasing a new home is an extremely exciting time, and any financial issues coming between you and your family should be avoided at all costs. If for some reason theres a disagreement on the process or if you’re concerned about repayment.
Purchasing a new home should be an exciting time, and you should try and prevent financial issues coming between you and your family. If, however, you can’t come to an agreement together or you’re worried about the amount of money that will need to be repaid, seek legal advice and draw up a legal contract to ensure both parties agree to the terms and conditions of the loan.