The Bank of Mum and Dad - what parents should consider when asked for help
Your Move recently reported* that the average deposit for a first time buyer (FTB) is £25,292. With the average price for a first time buyer home being £152,470*, this is more than 10% of the value of an average property and 64.3% of an average FTB income. For some it’s a challenge to raise that amount of money unless, of course, they gain the support of others – perhaps their parents.
Few will have failed to hear of the term ‘The Bank of Mum and Dad’ and of the increasing popularity for FTB’s to gain support from their parents in buying a home. But what, as a parent, should you consider before you respond to the often difficult, but much wanted, request for help?
1. The sooner the better
Decide as early as you can whether you’d like to support your child in eventually owning a home. For some it’s never too early to plan ahead and even the arrival of a new born can spur new parents into planning for the future by putting aside a regular amount each month for the benefit of their child. Your Move cannot provide advice on such savings but it might be worth seeking professional advice on what options may be available.
2. Consider the financial implications
Understand the financial implications on you, and your child, in helping them buy a property and make sure that there is a clear and mutual agreement about how the money is spent and what everyone’s obligations are going to be. You may need to consider any implications on inheritance tax, deed of trust, equity release, secured loans etc. so it would be wise to gain the support of a qualified solicitor to understand what is involved from the outset and what might be the best financial route for you – and your child.
3. Find the right product
Help your child in identifying the different types of mortgages on offer to support them in buying. There are joint mortgages, offset mortgages and even mortgages specifically designed to help parents provide support.
As an example one lender now offers a mortgage which offers a loan of 95% of the property value provided:
- the FTB agrees to pay the remaining 5% as a deposit and,
- the family members, or others associated with the child, take out an account with the provider into which they put 10% of the value of the house –which remains in the account for three years.
After 3 years, the account is closed and the parents will then be able to get their money back, with interest earned, provided that the FTB has kept up to date with their mortgage repayments. For some parents this provides a great way to effectively use money they have gained from their 'pension pot’ to help their children – often when they need it most. To gain the support of a Your Move financial consultant in finding out more about mortgages on offer and which may be suitablem, click here.
4. Draw up a pre-nup
Consider drawing up a pre-nuptial agreement in advance of lending any money to your child particularly when they are sharing the property with their spouse. If your child was to have a marriage breakdown, for example, it means that instead of the spouse automatically gaining half of the value of the property, consideration will be given to the support you have offered to your child for payment of it. Again the advice of a qualified, professional solicitor should be sought, to provide advice on the suitability of a pre-nuptial agreement, and how it should be set up.
5. Offer your wisdom
Share your wisdom and experiences of buying property. For some FTB’s the dream is to buy a large, exclusive property, fully furnish it with new items and still have money and time spare to enjoy the lifestyle they had before coming homeowners. In reality that’s not what usually happens. Providing parental advice about budgeting, money saving tips, what hidden costs to look out for as well as, perhaps, the appeal of second hand furniture is all part of the support a parent can give and ultimately highlights that the joy of owning your first home is often as valuable - and as welcomed - as money itself.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
Embrace Financial Services usually charges a fee for mortgage advice. The amount of the fee will depend upon your circumstances and will be discussed and agreed with you at the earliest opportunity.