With house prices soaring and mortgage lenders enforcing stricter lending criteria for borrowing; it is becoming more and more difficult for first-time buyers to get on the property ladder; which has resulted in more people turning to the ‘Bank of Mum and Dad’ than ever before.
Back in 1977, the average deposit paid by a first-time buyer was £1,094, 20 years later in 1997 it had increased to £2,200 and by 2017 it had risen to a staggering £25,867 – an increase of 2264% from 1977*.
As a result, industry figures** show that more than one in four UK housing transactions are now financed by the Bank of Mum and Dad, whether it is by loaning their children a deposit, gifting it to them as an early inheritance or being a guarantor on their mortgage.
However, many parents are rightly confused on financial decisions and it is crucial therefore, that parents get the correct advice on loaning or gifting money to make sure they are using the most tax-efficient avenue for both themselves and their children with repayment terms or agreed terms in place. This is to ensure they don’t get into financial problems a few years down the line or during retirement; especially as this age group have retired much earlier than their children will manage to do and therefore, their money needs to last considerably longer.
There are many ways parents can help their children; with the most important one being to teach them and encourage them to have good financial habits from the start. Showing them how to budget from an early age by saving their pocket money, birthday and Christmas money in a savings account is the first step; followed by making sure they keep up with credit card repayments, mobile phone bills, utility bills and any repayment loans they have to maintain a good credit score, which will all help when it comes to getting their first mortgage.
Parents have several options to help if their children are saving but simply cannot get on that first step of the property ladder. Re-mortgaging their own home, setting up a new mortgage or freeing up equity could all help but this is not always the route many parents want to take. Other alternatives are parents getting a joint mortgage with their children on a new property, being guarantors on their children’s mortgage or simply helping them shop around for better mortgage deals or Help to Buy schemes.
Before lending any money, parents should consider if they can afford to give it away; they may be financially secure now but it could all change during retirement. If they do not have the funds in the bank and would therefore need to re-mortgage or release equity, they need to ask themselves would their child want to see them go without or get into debt to help them. Another grey area is the issue of inheritance tax as there is a limit on how much money can be given away. If their child is buying a property with their spouse, partner or even a friend, they need to consider what happens if this relationship breaks down, so it’s imperative that terms are confirmed so all parties know where they stand.
To ensure the right decision is made for all parties and to avoid the risk of relationships going sour, parents need to get clear financial advice by contacting an approved financial adviser. There is a common misconception that financial advice is expensive and as a result many people do not take up the advice they greatly need; but this is generally not the case and sound financial advice can mean mitigating any risks of losing money further down the line.
Birchwood Investment Management Ltd have been advising clients for over 35 years, so if you would like to discuss any of the areas mentioned above please contact us – 01438 840888 or info@birchwoodinvestment.com
*According to a Savills report – https://www.openaccessgovernment.org/how-much-can-first-time-buyers-expect-to-pay-in-2018/44009/
** taken from http://www.financialreporter.co.uk/mortgages/bank-of-mum-and-dad-desperately-need-financial-advice.html
