Building up a deposit for a first home is not easy, particularly with rising property prices and the increased cost of living. There is a limit to how much can be saved by cutting back on lattes, and many people in their 20s and 30s are wondering if they will ever get on the property ladder.
Of course, some are fortunate enough to have family support. With careful planning, helping a child with a house deposit can benefit both parties.
Enter the Bank of Mum and Dad.
What is It and Why is It Needed?
The Bank of Mum and Dad is not an official term, but simply refers to parents financially supporting their children when buying a home.
In March 2020, the average price for a home in the UK was £248,271, with £199,959 being the typical asking price for the cheapest property type (terrace houses). Prices across the UK have risen by around 33% since 2010.
Average earnings are considerably behind, with typical weekly wages increasing by only 22% since 2010. The Consumer Prices Index has risen by broadly the same amount (21.4%). This indicates that while salary increases are just about covering the higher cost of living, home ownership is drifting further out of reach.
But long-term homeowners who are now in their 50s and 60s may find that they have benefited from low house prices and high growth. They may also have had greater capacity to save and invest throughout their working life.
Helping children onto the property ladder is often regarded as a logical move in this situation.
What are the Options?
There are a few different options for helping children buy their first home. For example:
- Funding the deposit as an outright gift.
- Providing the deposit in the form of a loan.
- Acting as a mortgage guarantor.
- Purchasing the property yourself (solely or as a joint owner) and arranging for your child to buy it from you over time.
- Buying the property and renting it to the child at a competitive rate.
- Family offset mortgages – some lenders offer lower interest rates and more accessible lending criteria if parents place their savings in an offset account.
The best option will depend on various factors, such as:
- The value of the property.
- The amount of savings the parent holds, and how much they are willing to use for this purpose.
- The child’s income and credit rating.
What Are the Benefits?
There are several benefits to using the Bank of Mum and Dad:
For the child
- It can make it easier to buy a first home.
- Years of rental expenditure can be saved.
- The appreciation in the property will make it easier to trade up when needed.
- It reduces the impact on credit ratings and can make borrowing more accessible.
- More of a safety net in the event of financial difficulty.
For the parent
- Peace of mind that their child has a secure home.
- Efficient use of savings.
- Potential Inheritance Tax reduction if the money is gifted outright.
What Are the Disadvantages?
Using the Bank of Mum and Dad is not the perfect solution, and there are a number of potential issues:
- The parents and the child may have different ideas about the method and the amount of support offered. For example, a parent may be prepared to help, but not gift an unconditional lump sum.
- The parents may not agree with the child’s choice of property.
- If the property is to be jointly purchased with a partner, there may be questions over the partner’s contribution.
- If the child runs into financial difficulty, this can also cause problems for the parents, for example loss of capital or impacted credit rating.
- The child may take their parents’ contribution for granted, and place a lower value on the property than if they had bought it independently.
- Conversations about money can be difficult between family members and may lead to disputes.
Of course, these problems won’t apply in every situation. Clear communication and unambiguous terms and conditions can help avoid the potential conflicts.
In the right situation, the tangible benefits will outweigh a few awkward conversations.
Is It Right for You?
Whether you are looking to buy your first home or support your children onto the property ladder, here are a few tips to ensure the process goes smoothly:
- Be clear, open, and transparent from the start. Always listen carefully to the other party if disagreements arise, and remember that everyone involved is an adult with their own views.
- Never give away more than you can afford to lose
- Check your credit rating online
- Thoroughly research the area the property is located in
- Seek professional advice