Securing a mortgage as a first-time buyer has become increasingly difficult in recent times. Despite the government schemes available to help first time buyers onto the property ladder, recent statistics from L&G suggest that one in every two first-time buyers aged under 35 receives financial support from the Bank of Mum and Dad.
In 2019, the bank of Mum and Dad provided an average contribution for homebuyers of £24,100. Some 21% of respondents to L&G’s survey said they received more than £30,000.
Accounting for contributions across all ages, the bank of mum and dad would be the 10th biggest lender in the UK if the total lending figures were placed alongside financial institutions.
Whilst helping children – or grandchildren – onto the property ladder is something that many parents are only too glad to try and do, generous family members will need to consider the wider implications financial and legal implications.
Here we look at some of the main considerations when helping relatives onto the property ladder.
Gifting Funds
One of the main considerations when helping family onto the property ladder is whether to gift or loan the funds. Gifted deposit contributions are the most straightforward route, although do come with their own potential issues. The main one is that gifts over the annual exemption (currently a total of £3000 per individual) may become liable for inheritance tax if the parent dies within seven years of making the gift.
Another potential hurdle with a gifted deposit is that it can prompt questions over who gets the money back in the eventuality that a couple splits and their house is sold. Parents will naturally want to be sure that the money they have gifted ‘follows’ their child in the event of relationship breakdown.
One way to ensure this is to ask a solicitor to draw up a legal document such as a Declaration of Trust. This states which buyer the gift was given to, and the share of the property to which they are entitled.
Parents will also want to be aware that in the event they gift any funds to a child (or other relative), they lose any future claim to that money or any stake in the property that is purchased. Many banks and building societies require the buyer to provide written proof that the deposit has been gifted and is non-refundable and unconditional, which could act as evidence should this later be disputed.
Loaning Money
Parents that may not be able to afford to gift a large sum outright have other options available to them, such as arranging a loan. One of the downsides of this is that some lenders won’t consider this arrangement, or would reduce the amount they are willing to lend accordingly.
Another consideration here is whether the loan will be protected by a legal charge and regular repayments will be anticipated, or whether the parents are to have a beneficial interest in the property. The latter option comes with the further complication that second property stamp duty rates may apply, so in many cases, this will try to be avoided. If the loan is to be repaid, it is highly advisable to have a contract put in place, referring to the payment terms and registering a charge on the property to ensure the loan is paid back. The charge on the deeds would specify that on the sale of the property, or when it is remortgaged, the money lent is repaid.
Other Options
Other routes to helping children onto the property ladder are available, including new types of joint borrower arrangement mortgages, family offset mortgages and putting a charge on your own home. Each of these comes with its own risks and downsides, all of which will need to be carefully considered before making any decision.
For further help and advice in relation to helping children or grandchildren onto the property ladder, and the legal consequences, please get in touch.
For any further advice, please contact us on 01457 761320.
