The Bank of Mum and Dad: Buying a House For Your Children
“Mum, can I have a house, please”. “But mum, I promise I’ll take really good care of it and clean it weekly. Pretty please. Why not? You’re so unfair. Stephen’s parents bought one for him and his sister”.
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“Mummmm, please! Everyone’s getting homes except me. I’ll look after it so well… Really? I can have one? Ahh mum, you’re the best… Can I get one with a swimming pool?”
Ok, the so-called “bank of mum and dad” might not be exactly the same as when your kids would ask for the latest new toy or their first pet – but parents are major players in the property world. In 2019 alone, they’re predicted to invest a whopping £6.3bn to help their children get on the property ladder.
Why is the “bank of mum and dad” so popular? And is it the right route for you, whether you’re the child or the parent? We take a look at the world of parents lending – or giving – their children money so that they can get the keys to their first home.
What is the “bank of mum and dad”?
It’s becoming increasingly common for young people to receive a contribution from their parents when purchasing a house – especially if they’re a first-time buyer. As deposits become more costly, many of us are turning to mumsy and daddio for that sweet, sweet cash.
In fact, the “bank of mum and dad” is now the UK’s sixth largest lender. Of course, if you’re a parent, your own circumstances also come into play. Releasing a large amount of equity is a big decision – even if it’s for your children’s benefits.
If you do decide to help your children get on the property ladder, it’s not as simple as handing some dosh over to your kids and them buying a shiny new home. There are financial aspects which must be taken into account.
Gift or loan?
In an ideal world, parents would hand the money over to their children and send them on their merry way, off on the market to find the home of their dreams. Before they get to the good stuff, however, there are a few things you sort out first.
Are you gifting a deposit to your children, or will it be in the form of a loan? If it’s a gift, both parties should understand what that entails, as a gift will be less formal and not require any repayment from the recipient.
If you’re providing the funds in the form of a loan, it might be a good idea to draw up some sort of contract. Going to such measures might sound unnecessary when lending to your children, but large sums of money should be taken seriously.
The gift that keeps on giving
Unfortunately, giving the deposit as a gift isn’t as simple as transferring money from your bank account to your child’s. There is a gifting process that needs to be followed, and both parties should be aware of any tax implications – such as inheritance tax – that are involved when gifting money.
You will also need to prove that the money is a gift, informing conveyancers and providing written consent. Be prepared to do anti-money laundering checks by providing bank statements to confirm that the money was earned legally.
Being on the receiving end
On the face of it, being on the receiving end of a sizeable deposit from mum and dad sounds great. Yet it’s not uncommon for children who receive funds from their parents to feel guilty or like they shouldn’t need any help.
In many cases, it’s the children who suggest funds come in the form of a loan, rather than a gift. However, borrowing from parents is a growing trend. One in five transactions in the UK mortgage market comes from the “bank of mum and dad”.
62% of people aged under 35 get help from their parents, while 22% aged between 44-54 are also borrowing deposit money from their folks. A further 7% in the age bracket of 55 and above also use “the bank of mum and dad”.
How do parents raise funds?
With the number of people turning to their parents for a deposit on their first home increasing, how are mum and dad financing everything? Some parents have savings in place and are happy to use them on their children.
Others sell their current property as they have decided to downsize and use the extra income to provide as a deposit for their children. Some are even doing it as a loan with interest – much like the banks -as current interest on their savings might not be particularly favourable.
Another option is drawing down on private pensions, using previous nest eggs to make sure their children are on the property ladder and have some form of security.