The bank of Mum and Dad
This month Rob Starr, CEO of Seico Insurance & Mortgages Ltd, offers his insight into the Bank of Mum & Dad:
We have a new mortgage lender in town, and it goes by the name the “Bank of Mum & Dad”. It is apparently now the sixth largest lender in the country. It’s funny because I always wanted to start a bank, I just never realised my only customers would be my children!
Due to the high cost of buying their first home first time buyers are finding that realistically to get on the market they need a financial partner who can stump up some cash. Who better to turn to than good old Mum & Dad? And this is not just the younger ones in the house, this is also the older children who have long since moved out into rental accommodation and will so often include their partner or spouse.
So can a parent do this in such a way so as to not only help their offspring start on the road to home ownership, but do it in such a way as to also protect their own hard earned (and so very important) nest egg, avoid the tax implications of a financial gift, or not treat this as an early inheritance.
Yes it can be done and there are various ways to achieve this; some might be better for you than others and it’s important you get the right advice before you take the bold step of offering this to your child – better to know you can than offer the pot of gold and then find out it’s not for you.
So here are some pointers, but please take advice from a broker who can steer you correctly: –
I’d love to help my children, but I also have my own future goals to consider, such as funding my retirement. I’m worried how I’d manage financially in the future, what advice can I get, what are my options?
Not every parent is capable of providing financial help to their children. But for those that are able to help, it is a balancing act between seeing your children settled in their own home while keeping one eye on the horizon for yourself. First and foremost if you haven’t already done so, speak to your financial adviser and ask for a health check of your current retirement plans. How much do you think you will want to live on in say 15 or 20 years’ time? When it comes to downsizing to release some of the equity you may have built up over the years, think carefully on what your next step will be and where you think you would be able to move to.
Gift or loan?
Simple one to answer but not a simple decision I’m afraid. If it is a gift, then you are not expecting to get the money back. So that there is no confusion, or awkward conversations in the future, this should be formally documented. Your solicitor will help you prepare a formal ‘Deed of Gift’ which sets out the position. If it is a loan you have a choice to expect it to be repaid or you can write it off formally. Many parents make allowances when loans are not repaid in their lifetime by deducting this amount in their offspring’s inheritance. And if you have more than one child you might want to make sure everyone is treated fairly – a strong will drawn up by a solicitor can cater for this quite easily.
Should I be on the mortgage with my child?
Yes you can take out a joint mortgage with your child, and yes, you will be named on the deeds as a joint owner. This gives you the maximum protection as you will be a joint owner. But there are serious Stamp Duty Land Tax (SDLT) implications in doing this. As you would be owning two properties currently an additional 3% SDLT surcharge applies, resulting in a total SDLT bill of £10,000 versus £0 for a first time buyer, or £2,500 if your child previously owned a property. You can however still protect your money and not be a registered owner of the property.
Protecting my money/gift/loan
This is easy to achieve and can be as simple as you need/want it to be (or as complicated if you prefer!). Simply put, you just need a letter of instruction that confirms how you will be lending the money and how you will be paid back. A solicitor experienced in property law can easily draw up an agreement between all the parties. A common way of doing this is to have a second charge added that confirms the amount you have contributed (the deposit) and that when the property is sold that you get back your capital plus any growth based on the percentage. So for instance if you lent 5% of the value then when the property sells you should get back your initial loan plus 5% of any growth the property has achieved. That way you not only help your child but also you are investing your money in a growing asset. One must remember though that property can go down as well as up and your investment is not guaranteed.
I’m not in a position to give my children any money. Are there any other ways I can help without handing over cash?
Those seeking to buy their first property will still need a minimum of a 5% deposit. If they can’t raise that amount, you could help by using some of the equity in your own home as security. Not all lenders will allow this, but many do and it is still the cheapest way of borrowing money over a long period. Speak to your existing lender or your mortgage broker and they can advise if this is possible, the costs involved and any possible complications that this might create. The same can apply if you have no mortgage but wish to raise capital on the property – speak to your advisor as there are various options from a traditional capital raise Remortgage to a more long term Equity Release plan.
However you decide to help I would always recommend you speak to your solicitor and your mortgage adviser first before you promise your children that your bank is now open for business. Your advisors are best placed to help from a legal perspective and to make you aware of your current financial situation.
A parent can offer the mortgage lender a type of financial guarantee by offering up a cash deposit; this will certainly have the least tax implications because the funds are only there to act as security. It is in effect no different to the parents offering their own property as security.