How can the Bank of Mum and Dad pass on the good fortune of property wealth to the next generation?

It is no secret that property has been very kind to the “Boomer” generation. Those lucky enough to own their own homes have enjoyed steady, almost uninterrupted growth in property values during their adult life meaning that the following generation are now struggling to raise the amount required for a mortgage deposit before even worrying about keeping up with the repayments as interest rates rise from their historic lows.

Leaving a mortgage free property in a will has been the accepted way of passing wealth to the next generation. Increased longevity means that this might not happen until the beneficiaries are well past fifty and their need for a family sized house and garden is decreasing as they start to wave goodbye to their own children. There has been a recent well publicised example of someone having to wait until they were 74 before finally inheriting his mother’s house!

There are several ways that the “Bank of Mum and Dad” can help children onto the property ladder at a time when they need it most.

1. A financial lump sum gift

Most lenders will accept a deposit that has been gifted and there is no immediate tax charge however an inheritance tax liability could arise at a later date. If your child is buying a house with a partner or friend(s), you can protect the money you have gifted using a deed of trust.

2. A loan

The loan agreement should set out the amount of interest and when it needs to be repaid i.e. when the property is sold. It should also state what should happen if anyone involved in the loan dies, or if Mum and Dad require the return of their money. Lenders will factor loan repayments into affordability calculations and it might limit the number of available mortgages.

3. Bank of Mum and Dad Mortgages

a) Guarantor mortgage

A family member acts as a guarantor by pledging savings or property as security which could be lost if the borrower misses payments or the property is repossessed.

b) Family Offset mortgage

The amount of interest the borrower pays is reduced by linking their mortgage to a family member’s savings account. The parent won’t earn interest on the offset amount and lenders will usually require a minimum amount in the linked account.

c) Joint mortgage

A joint mortgage with your child makes you equally liable for the repayment of the loan. If however you already own a property, then your child’s new home would count as a second home generating an additional 3% stamp duty. If it is your second home and you are still on the mortgage when the property is sold, there may be a capital gains tax liability.

d) Joint borrower, sole proprietor mortgage

You accept joint responsibility for the mortgage payments without having a legal claim to the property. Parent and child are both named on the mortgage but only the child will be on the property’s deeds avoiding the stamp duty surcharge.

We can guide you through these options to find the one that is most suitable for you and your family.

Having decided how you would like to help, a Financial Life Plan is a great way to help you decide how much support you can give whilst still allowing yourselves a good quality of life.

Please get in touch, we are always here to help with managing the Bank of Mum and Dad or anything else that is on your mind.

As a mortgage is secured against your home, it could be repossessed if you do not keep up the mortgage repayments.