First time buyers using the Bank of Mum and Dad – did you know that mortgage providers have rules around deposits funded by grants or loans? Simon Nosworthy explains everything you need to know
More and more first-time buyers are turning to the ‘Bank of Mum and Dad’ to help them get onto the property ladder, according to a new report.
This is what the Building Societies Association (BSA) says. the cost of buying and owning a home is currently at a 70-year high thanks to rising house prices and mortgage rates during the cost of living crisis. Private rental costs have also risen by almost 10% in the past year alone.
The prospect of making a down payment is so out of reach for some that family support is their only option, and it’s something we’ve seen more of in recent years.
However, conversations about money can be difficult, and there are certain rules and requirements surrounding financial gifts or loans. If you’re thinking about asking your parents for help, it’s best to do your homework first.
Determine whether it is a donation or a loan
It is important to determine from the outset whether the support offered is in the form of a gift or something that your parents expect to be repaid in the future. This information must also be included in every mortgage application.
Gifts…
Gifts are the most common, not least because they are exempt from inheritance tax if your parents survive for seven years. However, it is not as simple as transferring the money to your account as there are still certain legal obligations that your carrier must comply with.
First, your parents will need to sign a “gift letter” stating that the money is an actual gift, that they do not expect it to be repaid, and that they do not expect to have any interest in the property in the future.
They will also be required to provide proof of their identity, as well as proof of the origin of the funds. For example, if the money is in an ISA, they must make bank statements public. If it is an inheritance, your testator will need confirmation that this is the case – either through documentation showing how much was received, or from the executor of the will.
These are the same anti-money laundering rules as all of them transporters must be observed in every transaction. However, most people are not aware of it and may, perhaps understandably, find it somewhat intrusive when asked to hand over this information.
Loans…
The same process applies to loans, except that instead of a gift letter, your carrier will prepare a loan agreement (or a less formal promissory note) for you to sign.
This indicates that you understand the terms and conditions and how you want to repay the money. Loans tend to be less common because mortgage lenders are usually not keen on having another lender and this can affect whether some are willing to give you a mortgage at all.
What happens to parents’ money if the relationship breaks down?
One of the most common questions we get when a child buys the property with a partner is what will happen to the investment if the relationship breaks down.
In this scenario, you can protect your interests through a ‘deed of trust’. This allows you to record how much each party has contributed, so that they can be fairly compensated in the future if necessary.
For example, if your parents raise £15,000 of a £20,000 deposit, you can stipulate in the trust deed that you will receive a higher percentage of the proceeds when you sell. This is a good way to protect the gift you receive.
Parents can choose to purchase the property jointly with you, meaning their names will also appear on the title deeds. This is less popular because mortgage providers generally prefer to lend exclusively to the main resident(s). If your parents already own property, this means you will also have to pay higher stamp duty when you buy yours.
Parents can also offer to act as guarantorssign a warranty deed stating that they will be responsible if you fail to make mortgage payments.
Make sure you seek advice
Without the radical change in the housing market that was required the Building Societies Association reportthe ‘Bank of Mom and Dad’ will probably be around for a while – for those whose parents are able to help.
First-time buyers looking for a home in current market conditions without financial help from family would need two above-average incomes, the report said, but house price growth has been higher than profit growth for some time.
However, even with a generous helping hand, buying and owning a home is still a huge undertaking and it is always advisable to first seek independent financial advice on what is the best option for you.
Simon Nosworthy is head of the residential transfer department at Osborne’s Law