First-time buyers seeking to climb onto the property ladder are increasingly turning to the “Bank of Mum and Dad” for financial help.
Steep mortgage rates and strict lending criteria are making it tougher to get accepted for a mortgage as a first-time buyer, prompting many to turn to family for help.
Research from Legal and General reveals that financial help from family is involved in around 50% of housing transactions for those aged under 55. It also predicts that financial assistance from family members will support 318,400 UK property purchases in 2023, rising by about 12% to 357,200 by 2025.
Separate estimates from the Institute for Fiscal Studies (IFS) suggest that family lending provides around £17 billion in informal gifts and loans each year, with half of this money going towards property purchases or improvements. Money given to help family members get onto the property ladder averages more than £20,000.
However, while you may want to help your children out financially, it’s important to consider if this is something you can afford to do, particularly when living costs are rising.
In this article, we’ve put together eight tips if you’re thinking of gifting or lending money to your children.
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
Contents
- Review your own finances carefully
- Check if your child has received mortgage advice
- Consider mortgages which allow parental support
- Decide whether to gift or lend the money
- Decide the terms of the loan
- Consider Inheritance Tax (IHT) implications
- Consider seeking legal advice
- Consider gifting money using equity release
1. Review your own finances carefully
It might sound obvious, but think carefully before making any financial commitments that could have a detrimental impact on your future finances.
A survey from wealth management company Saltus found that around one in five parents offering financial support to their children sacrificed their own financial stability to do so.
As a starting point, review your outgoings – such as your mortgage and other bills – and financial goals for the future, and consider the impact on these of handing over money to your children, especially if you are giving it as a gift rather than a loan.
2. Check if your child has received mortgage advice
Before giving your child a helping hand financially, make sure they have fully explored all of their possible mortgage options and definitely need your help.
For instance, see if they have spoken to a mortgage broker, as doing so will help them understand which mortgage products might be available to them. It may be that they’re in a position to take on a mortgage on their own, even if they thought they weren’t, or that there are government schemes which they could take advantage of which might help them onto the property ladder without your support.
3. Consider mortgages which allow parental support
If your child would struggle to be accepted for a mortgage on their own, there are ways you may be able to support them without necessarily having to hand over a chunk of cash.
For example, you could agree to sign up to a guarantor mortgage. This type of mortgage means that you’ll be responsible for covering any mortgage repayments that they miss, but you wouldn’t have any ownership of the property itself. Acting as a guarantor can help your child access a mortgage that they might not otherwise be accepted for.
However, don’t sign up to be a guarantor if you feel there’s a risk your child won’t be able to keep up with payments. Acting as a guarantor should be seen by them as a last resort in the event their circumstances change dramatically, rather than as an offer to cover ongoing payments.
Bear in mind, too, that a guarantor mortgage is typically secured against your own property or savings, meaning that if you fail to cover repayments in the event your child can’t, your own assets could be at risk. If you are considering offering to be a guarantor for your child, you should make sure that you fully understand the potential risk to your own finances.
Another option you may want to consider is a family offset mortgage. This involves putting a certain amount of money into a savings account linked to your child’s mortgage, and their mortgage balance is then reduced by this amount, which reduces their interest payments.
For example, if you put £30,000 into a savings account linked to your child’s £150,000 mortgage, then the mortgage balance would reduce to £120,000. If your child’s deposit was £15,000, then the mortgage would fall from 90% LTV (loan-to-value) ratio to 87.5%, reducing their repayments.
Bear in mind that you usually won’t be able to access your savings for a few years or until after a certain amount of the mortgage has been repaid if you sign up to a family offset mortgage. Your savings will usually not accumulate interest in one of these accounts.
Read more about how you can help your child manage their mortgage in our article Can you help your child with rising mortgage rates?.
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
4. Decide whether to gift or lend the money
Some parents choose to help their children out by giving money towards a property deposit, which doesn’t need to be paid back. You can give your children money without it being subject to Inheritance Tax, provided you live for seven years after making the gift (read more about this below). However, you must be certain you won’t need the money later in life.
Alternatively, you could give your child a loan with the intention that this money is paid back at some stage. Some parents choose to set up a repayment plan in this scenario, including interest charges. As living costs spiral, this has become an increasingly common way for parents to help their children out.
Charlie Davidson, senior associate at law firm Bishop & Sewell, said: “With the ongoing cost of living concerns, and the cost of borrowing increasing, we’re seeing a switch to parents acting as true lenders expecting the debt will be repaid, in some cases with interest. The Bank of Mum and Dad is becoming a true lender in the mortgage market.”
5. Decide the terms of the loan
If you choose to lend your child money, it’s important to ensure that they understand the terms of the loan to avoid any uncomfortable discussions or conflicts further down the line.
It’s useful to write these down so that you are both clear on how the loan will work. For example, you might want monthly repayments, and it’s vital that your child understands if this is the case, rather than expecting to pay you back in full years later. .
Consider the following questions:
- Are you charging interest?
- If so, how much?
- What is the term (timeframe) of the loan?
- Do you expect monthly repayments or are you happy for them to repay on their own schedule?
- Can you be flexible if they have a month where they can’t repay?
Think all of this through carefully, and consider what you feel comfortable with, especially if getting your money back is important for your own financial situation.
6. Consider Inheritance Tax (IHT) implications
Before making a substantial financial gift, make sure you are aware of any potential Inheritance Tax implications. As mentioned, if seven years pass between the date that you give a large financial gift and the date of your death, then your children will not usually have to pay any IHT. However, if you die within this seven-year period, then the gift will be considered part of your estate and your children may have to pay tax on the gift (though that’s only assuming that the total value of your estate, gifts included, exceeds the current £325,000 IHT nil-rate band). Read more about how IHT rules work in our guide Inheritance tax: what are potentially exempt transfers?
You also have an “annual exemption”, or gift allowance, of £3,000, which is the amount you can gift per year without this money being subject to IHT. Exemptions also apply if the recipient is getting married or entering a civil partnership. For example, you can give £5,000 to your child, £2,500 to your grandchild or great-grandchild, or £1,000 to anyone else if they are getting married or entering a civil partnership. The wedding allowance can be combined with your annual allowance.
If the gift is not exempt from IHT, then it is taxed as follows: gifts given in the three years before your death are taxed at the full 40% IHT rate, while gifts given between three and seven years before your death are taxed on a sliding scale. This is known as ‘taper relief’:
- 0 to 3 years: 40%
- 3 to 4 years: 32%
- 4 to 5 years: 24%
- 5 to 6 years: 16%
- 6 to 7 years: 8%
- 7 or more: 0%
If there is a possibility of any IHT being charged on your gift when you die, make sure your children are aware of this.
7. Consider seeking legal advice
With a loan involving any large amount of money to someone, even to family, it may be wise to seek professional legal advice. You could even set up a legally-binding loan agreement so that there’s a framework for your child to follow.
This could be helpful if you are loaning a particularly large sum of money, or if you and the person you are lending to have a complicated relationship, and you would feel more comfortable having the loan agreement formally written up.
Seeking legal advice can also help to ensure you’re following any legal rules around lending. Though in most cases there are no legal issues with informal lending, there may be some niche cases where you need special approval from the FCA.
If you’re looking for a solicitor, you can find one through the Law Society’s free Find a solicitor service. Make sure you check reviews for the solicitor you’re planning to use, so you can see how other people have rated their service.
Additionally, if you are charging interest, then this will be considered taxable income and declared to HMRC, usually via a self-assessment tax return.
8. Consider gifting money using equity release
Many people want to help their children out financially during their lifetime, but may not be in the position to give away a cash lump sum, particularly as the cost of living is soaring. However, rising house prices over recent years mean that plenty of homeowners own a large amount of equity in their properties, particularly if they’ve paid off some or all of their mortgages. One option, therefore, may be to think about using an equity release plan to release some of the money tied up in your home to give to your child.
If you take out an equity release plan, you receive a lump sum from the lender, and can continue to live in your home until you die or move into care. Your home is then sold at this point to repay the loan, although plans now allow you to make repayments sooner than this if you want to. It is a legal requirement to seek advice before opting for equity release.
If you do decide to release equity from your home, make sure your child and any other family members understand that it will likely significantly diminish what you are able to leave to them when you die. Also bear in mind that an early inheritance counts as a financial gift, so it may still be subject to IHT if you die within seven years of giving it.
You should also be aware that following a series of increases in the Bank of England base rate to help curb inflation, equity release rates are currently high at the moment, so releasing equity may not be the best move for your finances. You might want to think about remortgaging instead to raise some extra cash from your property, but again you should seek professional financial advice to help you decide whether this is a sensible option based on your individual circumstances.
You can read more about equity release in our articles Equity release – what is it and how does it work? and Can I take money out of my property to give to my children?.
If you’re looking for somewhere to start, you can get expert advice from an independent equity release specialist with Unbiased. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
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