01 Finance

Exploiting the Bank of Mum & Dad

  • Is the Bank of Mum & Dad any good?
  • It can provide invaluable help to first time buyers

Do you have parents, grandparents or other relatives with money or property?

Did you know that they can help you to buy a home and get on the property ladder faster?

This blog tells you about the Bank of Mum & Dad (“BOMAD”) and explains how it can help you become a home owner.

A 2017 report from Legal & General revealed that parents and family members were set to provide £6.9 million to help buyers get onto the property ladder in that year, up 30% on the previous year, helping 300,000 purchases.

A 2018 report from Legal & General estimated that 62% of buyers under the age of 35 were assisted financially by a family member .

By all accounts, BOMAD is a major driver getting first time buyers onto the housing ladder.

This blog will deal with:

1. What is the Bank of Mum & Dad
2. How BOMAD can help you with a deposit
3. How BOMAD can help you with a mortgage
4. How money from BOMAD can be tax efficient
5. Potential issues and problems

 

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1. What is the Bank of Mum & Dad

The so-called Bank of Mum and Dad (BOMAD) is the name given to family members up and down the country, usually parents, who provide financial assistance to younger relatives to buy a property. 

The typical situation is where parents help a child to buy their first home.

The money advanced by the family member can be a loan or gift or a combination of the two.

If a  loan, interest may or may not be chargeable, depending on what the two sides agree.

The help provided is usually money-based, but it can also be practical such as acting as a guarantor of one kind or the other.

If you are due a legacy from a relative, you may be able to persuade them to release the money early to help with your deposit. 

Getting money from BOMAD is probably the quickest and easiest way you can raise money for a house deposit. bom

2. How BOMAD can help you with a deposit

BOMAD can provide you with a deposit by three main ways:

  • By relying on money, savings or investments readily available or
  • By releasing funds from a property or other asset or
  • By unsecured borrowing.

If your relative has the money in reserve, it is simply a matter of accessing it and paying it over to you.

If the cash is not readily available, it may be possible to raise funds from an asset such as by:

  • Taking out a loan against a property free of mortgage
  • Borrowing more funds against a property by remortgaging, taking out a second charge, obtaining a further advance or equity release
  • Releasing funds from a pension, endowment or other investment asset.

Another route is for the relative to borrow the money by way of an unsecured loan then transfer it to you – although there may be practical obstacles to this option, such as the age or earnings of the relative, or the cost of the borrowing.

A variation is for you to borrow the home loan, but with your relative acting as a guarantor.

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3. How BOMAD can help you with a mortgage

Your parent or other relative can help you with acquiring a mortgage as well as the deposit.

If you don’t tick all the boxes to be a borrower on your own (for instance you have a poor credit record) you may be able to secure a mortgage if a relative (or even a close friend) is prepared to be a mortgage guarantor on your behalf,  guaranteeing the mortgage payments in the event of default by you.

With this arrangement the property would be in your name.

A variation is to purchase jointly with your relative – in which case the property would be in the names of the co-owners.

With some mortgages, input from a relative may mean you don’t need to find a deposit at all. For instance with Lloyds Bank’s “lend a hand mortgage”, the bank will lend you 100% of the property price up to a maximum of £500,000 provided a relative signs up to save 10% of the purchase price with them for 3 years.

At the time of writing (June 2019), Barclays offers a similar product known as the  “family springboard mortgage”.

There are other creative mortgage products aimed at getting first time buyers onto the housing ladder with assistance from relatives. Carry out an Internet search to identify products which may fit your circumstances.

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4. How money from BOMAD can be tax efficient

Money given to you by a parent may have the effect of reducing their inheritance tax liability on death.

Seek advice from a tax specialist to explore all the possibilities.

One way inheritance tax can be saved is by making a “potentially exempt transfer” or “PET”.

Money given as a PET is not taxed at all if the giver survives 7 years after doing so. If the giver dies before the 7 years, some inheritance tax may be payable. 

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5. Potential issues and problems

When seeking help from BOMAD, you should be aware of the practical, monetary or tax issues which may arise and could lead to problems or disputes.

If your relatives give you money, will that leave them short going forward? If you borrow from them, will interest be charged and, if so, is the rate of interest fair and reasonable for both sides?

Generally, is it good practice for each side to seek professional advice before embarking on any course of action.

Any agreement should be in writing and preferably drafted by a solicitor.

In relation to tax issues, it is best practice to consult a tax expert in advance of any course of action which may have tax implications.

Conclusion

If your relatives have the money, tapping into the Bank of Mum & Dad may be the best way for you to secure the funds you need to become a homeowner.

There are a great many effective ways relatives can help you.

However, you should ensure that any arrangement is practical, realistic and reasonable – and a win-win for both sides.

Ensure each party seeks and takes independent expert advice in order to reduce the risk of disagreements or disputes at a later date.

Enjoyed this blog? Please share it with friends by clicking on the LinkedIn, Twitter, Facebook or Instagram icon on this page. 

Have you ever relied on the Bank of Mum & Dad? How did it go? Was it a bed of roses or more challenging?  Please leave your observations or comments below.

You may also find the following blogs useful:

Say no to being a tenant forever (how you can escape the tenant trap)
Property buyer newbie (explains the basic steps when buying)
Cut spending – grow deposit (raise a deposit fast by cutting your spending)

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Dalton Barrett
Rebel Property Coach

Please follow me on Twitter @Dalton1London
You can find me on FacebookInstagram and on YouTube
Please link up with me at LinkedIn

My website is: www.rebelpropertycoach.com


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