Finance

MUM & DAD TO THE RESCUE

In these days where it may seem impossible to get a foot on the property ladder, parents and grandparents are increasingly helping their children and grandchildren to become homeowners.

1. The Bank of Mum and Dad  

The term “Bank of Mum & Dad” (“BMD” for short) has become increasingly more widespread as properties become less affordable and adult children need to turn increasingly to parents (and grandparents) for financial help when buying a home.

According to Legal & General, BMD probably provided £6.5 billion to help adult children buy their own property in 2017, assisting with the purchase of £75 billion worth of property,  making it the equivalent of a top 10 mortgage lender. 

BMD has become flush with funds thanks to a huge property boom since the 1970s – punctuated here and there by the odd crash or downturn.


HELP FROM THE GOVERNMENT FOR FIRST TIME BUYERS:
Government help to buy (government financial help for first time buyers)
More help from the government (right to buy, right to acquire and shared ownership)


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2. Ways BMD parents can help

BMD parents can help their children by:

  • Giving them a house deposit from their savings or investments
  • Raising a deposit for them relying on their home or another property they own
  • Purchasing with them on a joint purchase basis.

QUICK HOUSE DEPOSIT:
50 Ways To Put Together A Deposit in 6 Months

3. Using a property to raise a deposit 

There are at least 7 ways parents can use a property they own to raise a large lump sum to help an off-spring to buy their own home:    

  • Sell a property. This can be the parent’s home or it could be a second or investment property they own.
  • Add value to a property – for instance by refurbishment, and then realise the value added by selling, mortgaging or remortgaging
  • Mortgage a property that is free of mortgage
  • Remortgage a property – taking out the existing mortgage and replacing it with a mortgage for a higher amount, with the extra funds being used to fund a purchase.
  • Obtain a second mortgage. Keep the existing mortgage in place and take out a second mortgage to raise the funds needed to fund a purchase 
  • Get a further advance. Add on additional borrowing to the existing mortgage.
  • Use equity release. Release some of the equity in a residential  property, typically repaying the amount borrowed at a later date such as when the parent moves or dies.


FIRST TIME BUYER BASICS
Buying a property fast (wacky and wicked ways to raise a deposit)
Say no to being a tenant forever (how you can escape the tenant trap)
Property buyer newbie (explains the basic steps when buying)


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4. Important considerations for parents and children 

Parents and children alike should look at any arrangement in a business-like manner, with full consideration of the practical, legal and tax implications of any action.

If BMD is providing a lump sum from savings, will it be a gift or a loan? If a loan, how long for and will interest be payable? What will be the impact in terms of income tax, capital gains tax and inheritance tax?

If BMD is providing funds through the use of a property, what are the pros and cons of the available options and which option seems best in all the circumstances?

If the two sides are looking to buy on a joint ownership basis, carefully assess the advantages and disadvantages of doing so: practical, monetary and taxation.

Once both sides have decided “what they want to do”, they should seek professional advice – legal and financial – to work out the best way to go about things so as to minimise risks, difficulties or disputes  going forward.


GETTING ON THE PROPERTY LADDER
Is getting a mortgage easy? (exposes the secrets of getting a mortgage)
My first property (basic stuff first time buyers must know)
Raising a deposit (14 common ways to bag a deposit with ease)

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5. Making the case 

If you are the offspring hoping to persuade your parents to help you out, there are four main lines of argument you can take:

  • Early legacy – the lump sum to you can be seen as early payment of a legacy you may receive eventually
  • Tax – a gift to you may be tax efficient
  • Practical – help with your deposit is a great way to get you to leave home
  • Moral – help with your deposit is an admirable way to fulfil parental duties and obligations!

Generally it is a good strategy to identify and emphasise any possible  gain or benefit to your parents. Don’t feel reluctant to draw to their attention any gain, advantage or point of self-interest in their favour. 

Are you a “banker” at BMD?  Are you a “borrower” looking to raise your deposit with the help of BMD? What are your thoughts, concerns or experiences? Do you wish to share? Please leave your comments below.

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Dalton Barrett
Rebel Property Coach

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My website is: www.rebelpropertycoach.com

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