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The Bank of “Mum & Dad” is reported to be the 10th largest UK mortgage lender, with £5billion+ p/y lent from parents & grandparents. Understandably, parents want to help their children onto the property ladder, however it is also wise to take action to keep your money safe, particularly if your child is planning to buy a property jointly with a partner.
10th largest mortgage lender in UK
A report by Legal & General showed that family are, by large, propping up the housing market, with a massive £5billion being lent by parents and grandparents each year to help their children buy a home. The extent of family borrowing is equal to Clydesdale Bank in 2014, ranked as the 10th largest mortgage lender, based on gross lending.
The report estimates one in four property transactions in the UK have an input from the so called bank of “Mum & Dad”.
Where generosity can go wrong
Naturally, where funds are available, family aim to help, especially in this market where first-time-buyers struggle to get onto the property ladder.
However, there are situations that arise where the generosity of family can back-fire, especially if a property is being purchase jointly.
Relationship breakdown is one of the most common reasons for legal disputes over property, according to experts. Without legal protection, families leave themselves at risk of losing some or all of their money.
Similarly, whilst one hopes trust resides between parent and child, there are also occasions where this trust is broken, for whatever reason, and parents can be left financially worse off.
Lending wisely – 4 considerations
Here are a four considerations. Speaking to a financial adviser who can draw up a financial plan for your family will also help.
Opt for a structured mortgage
There are mortgage products available now which focus on providing a service for the family. The Barclays Family Springboard mortgage has recently been updated and provides the option for the parents to make a contribution to a savings account, instead of the child making a deposit on the property. After 3 years, the savings are repaid, meaning your money is protected, so long as mortgage repayments are maintained during this time period.
Be named on the mortgage
Many parents opt to be part of their child’s mortgage, enabling a higher level of borrowing from factoring in their income too. However, new Stamp Duty Land Tax rules for second-homes are likely to deter parents from this option in the future, with an added 3% tax to pay if the parent already owns a home.
The other issue with this option are that rates are typically higher with a lower deposit so whilst there is a boost in the level of borrowing accessible, there is a risk of being committed to a high rate of interest for longer. It is still an option though.
Make a cash gift – with a Declaration of Trust
A cash gift can often be the best way to help children access cheaper mortgage rates from putting forward a higher deposit.
A Declaration of Trust is an agreement between the lender and the buyer to pay back the amount borrowed in an agreeable timeframe, which could be weekly, monthly or upon sale of the property. The arrangement can be interest free or include interest. It can be with just your child, or with multiple people with an involvement with the property transaction.
It is important to note that in this situation, the loan to the bank will always be the first to be repaid. Initially, a restriction needs to be added to the mortgage that the loan can not be increased, which would effectively reduce the available equity in the property.
Nevertheless, if the property falls in value and issues arise, you do still stand to lose some or all of your investment, depending on circumstances.
Make a cash gift – with a Declaration of Trust AND a cohabitation agreement
For added protection, consider Shared Ownership Protection, an agreement which can be drawn up for a small fee. The agreement protects for relationship breakdown, and ensures the money is retained within the immediate named family.
It allows control for you as a parent, with peace of mind that your money is protected, yet it enables money to be utilised within the family as best required.
Want to help your child buy a home? Speak to Darren
Dental & Medical Financial Services can help you with preparing a family financial plan and provide advice on the best way to help your child onto the property ladder. Call Darren to discuss your requirements.
Tel: 01403 780 770