More and more first-time buyers are turning to the ‘Bank of Mum and Dad’ to help them get onto the property ladder, according to a new report.
The Building Societies Association (BSA) says the cost of buying and owning a home is currently at a 70-year high thanks to rising house prices and mortgage rates amid the cost-of-living crisis. Private rental costs have also soared by almost 10% in the last year alone.
The prospect of saving a deposit is so out of reach for some that family support is their only option and it’s something that we have seen more of in the last few years.
Conversations about money can be tricky, however, and there are certain rules and requirements around financial gifts or loans so if you’re thinking about asking your parents for help, then it’s best to do your homework first.
Establish if it is a gift or a loan
It’s important to establish at the outset whether any support being offered is in the form of a gift or something that your parents will expect to be paid back in the future. This information must also be disclosed on any mortgage application.
Gifts…
Gifts are the most common, not least because they’re exempt from inheritance tax should your parents survive for seven years. It’s not quite as simple as them transferring the money into your account though as there are still certain legal obligations that your conveyancer is obliged to fulfil.
Firstly, your parents will be required to sign a ‘gift letter’ stating that the money is a genuine present, that they do not expect it to be repaid and do not expect to have an interest in the property in the future.
They will also have to produce proof of their identity, and proof and source of funds. For example, if the money is sitting in an ISA, then they must disclose bank statements. If it’s an inheritance, then your conveyancer will need confirmation that this is the case – either by documentation showing how much was received or from the executor of the will.
These are the same anti-money-laundering regulations that all conveyancers must adhere to for any transaction. However, most people aren’t aware and can, perhaps understandably, find it somewhat intrusive when asked to hand over this information.
Loans…
The same process applies with loans except that, rather than a gift letter, your conveyancer will draw up a loan agreement – or a less formal promissory note – for you to sign.
This details that you understand the terms and how you intend to repay the cash. Loans tend to be less common as mortgage providers typically aren’t keen on there being another lender and it may affect whether some are willing to grant you a mortgage at all.
What happens to parents’ money if the relationship breaks down?
One of the most common questions we get asked, in cases where a child is buying the property with a partner, is what will happen to the investment if the relationship breaks down.
In this scenario, you can protect your interests via a ‘deed of trust’ which allows you to record how much each party has contributed so, if necessary, they can be recompensed fairly in the future.
For example, if your parents stump up £15,000 of a £20,000 deposit then you can use the deed of trust to stipulate that you will receive a higher percentage of the proceeds if sold. This is a good way of protecting the gift that you will have received.
Parents could opt to jointly buy the property with you, meaning their names would also be on the title deeds. This is less popular as mortgage providers tend to prefer lending to the principal occupier/s only. If your parents already own property, it means you will incur a higher rate of stamp duty when purchasing yours as well.
Parents can also offer to act as guarantors, signing a deed of guarantee to say that they will bear responsibility if you default on the mortgage payments.
Make sure you seek advice
Without the radical change to the housing market called for in the Building Societies Association report, the ‘Bank of Mum and Dad’ is likely to be around for some time to come – for those whose parents are in a position to help.
First-time buyers looking for a home in current market conditions without financial help from family would need two above-average incomes, the report said, but house price growth has been higher than earnings growth for some time.
Even with a generous helping hand, however, buying and owning a home is still a huge commitment and it is always advisable to take independent financial advice first about what will be the best option for you.
Simon Nosworthy is head of residential conveyancing at Osbornes Law
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