Bank of Mum and Dad: is it better to loan, gift or go guarantor?

If you’re looking to help your child onto the property ladder, you’re not alone. The Bank of Mum and Dad has been ranked as a key rival to the ninth biggest mortgage lender in the UK, with a collective £6.5 billion floated on the property market in 2017 to help loved ones attain that first home dream.

As many as two thirds (69%) of those who have accepted help admit they could not have afforded a home without the added financial backing.[1] Under 35s are the most likely to receive help (nearly three in five), but one in five of those between 45 and 55 also seek out home buyer help from parents.[2] In any case, it’s obvious Mum and Dad’s support is well-intentioned.

Of course, there are positives to helping your child with that key start (and perhaps being able to get that theatre room you always wanted with the spare space), but there can be a lot of risks too if you don’t have the right advice. It is worthwhile knowing some of the Bank of Mum and Dad options, and learning about their various implications, rather than investing £10,000s and simply hoping for the best. This quick QualitySolicitors guide looks at three ways you can support your budding future homeowners and what you may need to take into account throughout the process.

What type of Mum and Dad bank do you want to be?

A loaner

Many parents lend their children money to buy a home, with the Bank of Mum and Dad contributing to 25% of house purchases according to a recent study from Legal and General.[3] A quarter of UK parents would be happy to lend their children money at interest, with the average rate at a high 4.3%.[4] The positive for the parent is that you are not just giving your money away and in fact could end up earning on the loan. For the child, the benefit is that they wouldn’t have to pay income tax on the loan.

There can be financial and emotional pitfalls for both parties if the details of the arrangement are not clarified early on. For example, what would happen if your child’s marital arrangements changed? What if the loan is mistakenly viewed as a gift? Are there any protections in place if the house is sold before full loan repayments are made?

To avoid any difficult conversations further down the line, it’s worth sitting down together with an experienced conveyancing solicitor who can explain everyone’s obligations and help put those nagging ‘what if’ questions to bed. A lawyer will look at each party’s obligations to one another, but also everyone’s rights under the law. Having a loan in place can raise an equitable interest in property that can technically compete with legal title. This shouldn’t come as a surprise to anyone if there need to be any changes to the arrangement later on. Agreements can be formalised with a ‘promissory note’ which can reduce the risks of fallouts and late-payments.

Another benefit is having a ‘deed of trust’ set up, meaning that if the property is sold before the loan is paid off you will get your money back. Again, this would need to be drawn up by a solicitor, but this will show how much money you’ve given and outlines how you will get this money back if the property is sold in the future.

Lending money to family members can also come with emotional baggage. There are cases where children who have borrowed money from their parents constantly feel obligated to pay their parents back in full as soon as possible and so end up using the majority of their income on the loan, neglecting spending on other aspects of their lives. .

Always ensure you keep a record of payment, regardless of how much you loan, as this will reduce potential fallouts over money later on. Also, if for any reason the repayment schedule needs to change, make the amendments with a professional witness.

The giver

There is the option to just give your child the money instead of lending. The obvious benefit here is that there is no legal obligation to repay, so no emotional issues could arise. However, there are still a few things to be conscious of if you decide to do so.

Firstly, you have to make sure you are financially able to give the money. With the average parental contribution currently at a hefty £18,000, many parents end up dipping into their savings to help fund their kids. In some cases, they re-mortgage or downsize their home or even postpone or come out of their retirement.[5] It’s wise to be fully aware of and prepared for potential changes in your own finances before giving a large sum of money away. For example, if something happens, say you are made redundant or unexpected expenses arise, such as your car breaking down, would you be able to afford the setback or would you need to borrow money yourself?

Even though there are no tax implications at present, your child could still be eligible to pay income tax on the amount if you pass away within seven years of gifting the money. Of course, this isn’t something that can be predicted at the time, but still something for both parties to be aware of.

The guarantor

Another option is to be recorded as the guarantor of the property. The benefit here is that it will help your child get a mortgage without you needing to initially part with any money or for the child to put pressure on themselves and you with a loan. This option also allows your child to be the full legal owner of the property and for you to be there as a ‘safety net’ if repayments fall into arrears or something unforeseen was to happen.

However, this option could be seen as the riskiest. If, for whatever reason, your child misses their mortgage repayments, then you could be responsible to pay the whole mortgage off. This risk can be slightly relieved depending on the type of mortgage your child opts for; there are an increasing number of mortgages that cap the limit a guarantor must pay and so it pays to shop around.

Sometimes the guarantor can put their own property as collateral against the mortgage for the child’s home. As a worst case scenario, you could lose your home! This is another reason it is so important to seek legal advice early before blindly entering into any sort of agreement. Having a clear plan in place can help protect your legal relationships to one another, but most importantly your family bond.

So, which option is best for you?

Crunch time. Your child has sat you down and asked the Bank of Mum and Dad for help… so which option do you choose? Here’s our final quick summary:

• If you are happy and financially able to give the money outright then this might be the simplest option.
• If you believe your child will be able to keep up their side of the deal then a loan backed by a repayment schedule from a legal specialist might be better for both parties, as long as the trust is there.
• If your child just needs a helping hand on the mortgage, then opting to be their guarantor might be best. However, you need to be sure that your child will be able to keep up with their payments.

In any case, make sure both you and your children consult a legal specialist before an agreement or decision is made. It is important to remember that each option has legal implications, even if you are not aware of what these are.

To find your nearest QualitySolicitors conveyancing specialist, click here or call us on 0808 196 3305.

 

[1] Legal and General Group, ‘The Bank of Mum and Dad’, August 2017 .

[2] BBC News, ‘Bank of Mum and Dad “feels the pinch”’ (29 May 2018, online) .

[3] As above.  

[4] Leah Milner, ‘Bank of Mum and Dad charging 4.3% interest’ (5 June 2018) .

[5] As number 3.