Every year, the Bank of Mum and Dad comes to the aid of tens of thousands of first-time buyers, helping them embark on their journey to homeownership.
In the preceding year alone, a substantial 46% of first-time buyers received invaluable financial assistance from their parents to facilitate their property purchase. An impressive £8.8 billion exchanged hands, a testament to the significant impact of this support (source: Savills).
However, for parents considering supporting their children or for prospective buyers seeking parental aid, several crucial aspects warrant careful consideration.
Gifting Funds:
Prior to gifting a lump sum, it is imperative for parents to meticulously plan their finances to ensure sufficient reserves are available in case circumstances change in the future.
Parents aiming to mitigate inheritance tax (IHT) should familiarize themselves with the intricacies of IHT and stay well-informed about the relevant rules and regulations.
Buyers should proactively inform their solicitor and mortgage broker about the financial assistance received from the Bank of Mum and Dad. As part of anti-money laundering regulations, parents are required to provide identification and verify the source of the funds. Additionally, the bank may necessitate written confirmation that the money is intended as a gift.
To safeguard their contribution in cases where their child is purchasing the property with a partner, many parents opt to protect the funds through a deed of trust. This thoughtful measure ensures that, in the unfortunate event of a separation, the funds remain ringfenced for their child’s benefit—a prudent approach despite its uncomfortable contemplation.
Loaning Funds:
When loaning funds, it is essential to establish a clear and unambiguous repayment plan to prevent potential conflicts in the future.
Buyers should transparently disclose to their lender that a portion of their deposit originates from a loan, as this information significantly influences mortgage affordability calculations.
Acting as a Guarantor:
An alternative option is for parents to act as guarantors on the mortgage, pledging their savings or home as security. However, it is vital for parents to be aware that assuming this role entails the responsibility of covering the mortgage should their child encounter financial difficulties, potentially risking the loss of their own home.
Joint Mortgage:
A more intricate approach involves obtaining a joint mortgage, wherein parents or parent and child share the mortgage obligation. While this option distributes the burden of the mortgage among all parties involved, it is crucial to recognize that if one person is unable to fulfill their payment obligations, the other mortgagees become liable.
Moreover, it is important to note that opting for a joint mortgage might trigger stamp duty implications if the parent already possesses a property.
In conclusion, the Bank of Mum and Dad plays a vital role in assisting first-time buyers, but it necessitates careful planning, communication, and consideration of the potential legal and financial implications involved. Seeking professional advice and guidance throughout the process can help ensure a smooth and secure transaction for all parties involved.
If you want to buy a property, contact us today. We’re here to help.
