A recent report has suggested that parents are spending so much money helping their children onto the housing ladder that they are now one of the biggest lenders in the UK.
The report indicated that the average contribution from parents this year is £24,100. This is up more than £6000 compared to last year, according to Legal and General.
It goes on to say that parents have given £6.3bn, high enough to rank the so called Bank of Mum and Dad at 10th place if it was a mortgage lender.
However, L&G went on to say that parents should exercise caution when providing funds as this may effect their income in retirement.
So what are some of the approaches being used –
This is the straight forward way to help – parents providing a non refundable gift. Usually a letter is required by the mortgage lender confirming that the gift is non refundable and the parents have no interest in the property.
The main issue here is that the money has been given away which could effect income in retirement for the parents so this needs to be considered.
An alternative could be for parents to loan funds to children to be repaid at some point I.e monthly, annually etc. The potential issues here are that a) some lenders don’t like loans being taken as deposit and b) the regular payments may need to be taken into account for affordability purposes.
We have seen exceptions to this where parents have provided funds, but would only like them back on sale of the property (this can also involve a trust). In this instance, the parent’s money is still ringfenced, however this will not be of any benefit for the parents regarding income in retirement.
Family Assisted Mortgages
Some lenders have innovated in this sector to enable parents to help their children using savings or the equity in their property as security.
This has benefits as the parents will not necessarily have to gift funds to their children indefinitely. They simply use their savings and / or equity in their property as short term security for the mortgage. When the children are ready to take the mortgage on themselves, the security is released and the savings / equity go back with the parent’s in its entirety.
This is a useful approach as the parents retain their assets for later life, the children get the mortgage they need and it’s not classed as a liability as there are no monthly payments. However, these mortgages are only available from a handful of lenders and specialist mortgage advice is recommended before proceeding.
Joint Borrower Sole Proprietor Mortgage
The Joint Borrower Sole Proprietor mortgage is another way that families can help each other, especially where income is an issue.
This type of mortgage allows family members to be added to the mortgage for affordability purposes, but not on to the deeds for ownership purposes. This is important because, assuming that the parents are already homeowners, by not going onto the deeds, the second property stamp duty levy will be avoided which can save a considerable amount of money.
The key thing to consider around a Joint Borrower Sole Proprietor mortgage is the longer term plans. The parents will still be liable for the mortgage so if their plans involve taking out finance or mortgages in the future, this will need to be carefully considered.
It’s common for parents to remortgage in order to raise funds to gift to children. Again, the lump sum of equity raised will need to be passed across in one or some of the ways mentioned above I.e. loan, gift etc.
As with any mortgage, the key consideration here is affordability (both now and in the future). The parents will be fully liable for the mortgage which includes the monthly payments.
Following on from the above, for parents (or grandparents) in later life who may want to raise equity in their property to gift to family, a Lifetime Mortgage may be a suitable solution.
This will only be the case where either affordability for a standard or retirement interest only mortgage (AKA ‘RIO Mortgage’) isn’t achievable or the borrower would prefer not to make monthly payments.
With this option, specialist advice is absolutely crucial as many other options need to be suitably ruled out before considering such an approach.
It looks like the Bank of Mum and Dad is here to stay and will play a crucial part in helping families onto the property later.
While it’s in most parent’s minds to help their children as much as they can, it’s important to consider their own needs, especially as later life approaches.
By seeking specialist advice around mortgages and financial planning, you will be able to ensure the best outcome for the whole family.