Are you contemplating going to the Bank of Mum and Dad for help with the deposit for your home? Or you’re a parent who wants to help your children onto the property ladder? The simple fact is that parents are helping their children finance their home more and more thanks to the affordability of properties in many areas of the UK.
The benefits are clear to see. Between you, the home you have dreamed of can become a reality, and with a larger deposit, you may have access to more competitive interest rates and mortgage terms.
But there are some serious considerations to be made to ensure that you don’t walk into some nasty surprises later on.
The Bank of Mum and Dad: 3 key questions to answer
1. Consider your personal circumstances
As a parent, you’ve chosen to help your children. But consider your personal circumstances and your financial position. Can you realistically afford to help with finances? There could be different means for you to raise finance including from savings, you may be able to access lump sums from pensions, or remortgage your own home for example. All of these come with risks, so taking advice from an independent financial adviser is a good idea. And you need to consider what impact this expenditure will have on your lifestyle.
2. What if something goes wrong?
There could be a number of things that could go wrong. As parents, you could become ill or incapacitated, lose a partner, or your children’s relationship could break down if they are in one. There are things that you can do to manage any problems, and we’ll look at these in more detail.
3. What does the future hold?
Can you read the future? We’ve taken a look at question 2 and what could go wrong, but things could also go right. So what then? What if your children want to move home? Could there be times when you might need to access your finances, healthcare, or something else? How would you manage and organise what you can’t foresee?
The Bank of Mum and Dad: people, death and taxes
So what can you actually do to ensure that as parents, you can help your children while ensuring fairness and transparency, and as children that you can secure your house purchase and be financially secure?
1. Is the Bank of Mum and Dad making a loan or gifting the money?
The key thing here is to ensure that all parties understand the nature of the finance. If it is a loan, take professional advice and draw up a suitable agreement. Will you charge interest or not, what are the terms, who is liable for the debt, and so on. If you’re gifting the money, there could be tax implications. If you die within 7 years of making the gift you could be leaving a hefty inheritance tax bill. There could be other considerations as well. So we always recommend taking advice from a qualified professional
2. The Bank of Mum and Dad Loan
A few things to consider if you’re loaning the money for a deposit:
- Agree a repayment schedule
- Agree interest to be paid, if any
- Ensure the correct mortgage protection is set up to protect all parties
- Consider where a loan sits in your estate planning, and take advice
- There may be other considerations, so take professional advice
3. Is the Bank of Mum and Dad a mortgage guarantor or a deposit provider?
We’re looking at some of the things to consider if you’re gifting or lending a deposit in this blog. But if you’re a guarantor to the mortgage, can you afford to meet the payments if your children default? Are they financially stable, in good jobs, and understand the responsibility that you’re taking on for them? And if they have a partner, are they reliable, and what happens if they split up? As always, we recommend taking professional advice and reading the small print, but discuss as a family so that you all understand the implications for guarantors.
4. Establish the legal status of the property
What we mean by this is who owns what. the mortgage lender will hold the first charge, but who will have their name on the deeds? If your son or daughter has a partner, will they be on the deeds too and have liability for not only the mortgage but your loan as well? How will you protect your money in the event that something goes wrong. This is a complex area, and it may seem a bit strong to be talking about defaults and debt, but if this is clearly recorded upfront you can avoid realm problems later on if something goes wrong.
5. Death and Taxes
As we’ve already mentioned, this is an area where you could leave a large tax liability if you’re not careful.
- If you die and you’ve agreed on a loan, what does that mean to your estate, and if or how does your estate manage that loan?
- If you give a gift and you die less than 7 years later, would your children have a large inheritance tax liability that they may not be able to afford?
There could be some complex implications here, so we recommend speaking to a professional estate planning consultant.
6. The Bank of Mum and Dad should take professional advice at the start
We’ve mentioned this a number of times already, but taking the right advice can provide you with peace of mind that both you as parents and your children as recipients of your money have everything in place should something go wrong.
We’ve been deliberately blunt writing this article, but we believe that putting in place what you need to safeguard all parties is critically important. That said, helping your children with one of the key milestones in their life will be hugely rewarding, and as parents, you can be proud and pleased that you have been able to offer that support.
But remember, parents might want to spend their hard-earned money on their own retirement. And that’s ok too!
The Fireproof Box
There are more sophisticated ways of storing vital information these days, but the idea still stands.
Both parents and children can help the other out by keeping key documents and information in a safe place. That could be, quite literally, in a fireproof box in your home, in secure storage, or somewhere else.
But some of the things that you could keep together are:
- Your Will
- Lasting Powers of Attorney
- Deeds to your home
- Insurance Policies
- Details of your attorneys (for LPAs) and Executors (for your will)
- Details of your solicitor, estate planning consultant and any other relevant professionals
In the event that something goes wrong, your family will know where to look to find your documents and instructions on what to do should you be unable to.
If you have any queries about the information about the Bank of Mum and Dad get in touch with a member of our team
Liddle Perrett Ltd is an appointed representative of PRIMIS Mortgage Network. PRIMIS Mortgage Network is a trading style of First Complete Ltd which is authorised and regulated by the Financial Conduct Authority.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE