"It has never been more challenging for first-time buyers to get on to the property ladder with increasing numbers of young people turning to the Bank of Mum and Dad."
It has never been more challenging for first-time buyers to get on to the property ladder with increasing numbers of young people turning to the ‘Bank of Mum and Dad’.
Parents fund around 25% of mortgage transactions each year. According to The Money Charity, parents provided their children with a staggering £5.7bn in 2018. First-time buyers are now having to find a deposit which equates to around 98% of their average annual salary*.
“There are many ways that relatives can help such as through a loan or a gifted deposit,” says Penny Gordon, head of residential property at leading Ipswich law firm Prettys.
Here Penny outlines a number of ways that parents can help children become homeowners for the first time:
Gifting a deposit
To help your children buy a home, one way to do this would be to gift the deposit to them. The mortgage lender would usually require the donor to sign a declaration that they do not want the money back and that they do not wish to hold any legal or equitable interest in the home.
Gifting or increasing a deposit may also help borrowers to access more competitive mortgage deals.
A gifted deposit would reduce a parent’s estate for inheritance tax purposes and inheritance tax may have to be paid on the gift if the donor dies within seven years of making the gift. A parent wishing to make a gift to a child in this way should seek advice from an estate lawyer first to consider the implications the gift may have on their estate and on any other beneficiaries to their estate.
A Declaration of Trust
A declaration of trust is one way to protect unequal shares when couples co-own a property. If parents have gifted a deposit to their child and a partner it would be advisable for the couple to enter into a declaration of trust to confirm the contribution that each owner has made to the purchase of the property.
This would ensure that it was clear from the outset, that in the event the couple separate, the gifted deposit percentage share of the equitable interest in the property would return to the child in the first instance. In this way the parent’s gift will remain with their child and not the partner or cohabitee.
How to protect yourself if you make a loan to your child
Parents can lend their children the money to buy a property in place of a mortgage lender.
A loan from a parent to a child may be known as a ‘private loan’ and can be protected in the same way as a commercial loan, otherwise known as a ‘charge’, by way of secured charge on the legal title for the property.
A loan agreement containing all the terms of the loan should be drawn up and incorporated into a Land Registry form to be registered on the title of the property by way of ‘secured charge.’
If a parent chooses to make a loan to their child this would not impact their own estate, as in the case of a gifted deposit.
If the parent does not wish to secure their loan on the property an alternative method of protection would be a declaration of trust declaring the ownership of the equitable title.
The declaration of trust can be protected by way of a restriction registered on the title for the property. The restriction would be the notification that there is a trust of land behind the legal title but the details of the trust would not be noted on the public register.
Help children set up a Help to Buy ISA
To qualify for the government’s Help to Buy ISA scheme you must be 16 or over, have a valid National Insurance number and be a UK resident. You must also be a first-time buyer and not own a property anywhere in the world. You cannot have another active ISA in the same tax year.
The scheme is closing on the 30 November 2019. If you have an open account prior to this date you will be able to continue saving but you must claim your bonus by 30 December 2030.
The maximum amount the Government will give you is £3000 so the most you can save in a Help to Buy ISA is £12,000. The minimum amount you need to qualify for a payment is £1600 which would give you a payment of £400. You can save up to £200 per month with an initial deposit into your account of £1200. The Government will give you £50 for every £200 that you save representing a 25% top up to your savings.
Parents and grandparents can assist their children with contributions towards their savings helping to give them the best chance possible and building a deposit for their first home.
Help to Buy Equity Loan
A Help to Buy Loan would enable a young person to purchase a property with a 5% deposit. The Government would top this up with a loan amounting to 20% of the property value which would be interest free for five years. Therefore your child would only need a mortgage of 75%.
This scheme is only available on new build homes up to a value of £600,000 in England, £300,000 in Wales and £200,000 in Scotland. This initiative is due to end in 2021.
Discuss finance with children from an early age
Encouraging children to save from an early age and have their own bank account is a positive starting point for them for healthy money management. Children can save birthday and Christmas present money which can easily mount up over the years. A trip with mum, dad, grandma or grandad to the bank to pay money into their own accounts and watching it increase will help to give children the best financial start in life as well as building fond family memories.
Talk to your children with honest, practical advice about finances and buying a property, ensuring that children understand from an early age, as best they can, about the cost of living and encouraging them to save will help them on their way to owning their own home. You can be creative in how you do this dependent on the child’s age.
Chatting about savings from an early age and good money management is important.