How can parents help their children get started on the property ladder?
According to a survey carried out by Lloyds Bank, 56% of young people are worried about joining the property ladder, however, only 27% of these have discussed this with their parents. The “M Word” campaign launched by Lloyds Bank aims to break this taboo and encourage these difficult conversations about money. But how exactly can parents help their children purchase their first home?
The Gifted Deposit
The straightforward option is for parents to help pay the deposit as a gift. This option allows the purchaser to use the amount as a deposit but gives the parents no interest in the property and no right to their money back following the gift. Any informal arrangements could not be relied on if things turn sour. In general terms there are no limits on the sums that can be gifted and there are no immediate tax implications. However, if the gifting parents die within 7 years then Inheritance Tax maybe payable on the amount.
Loan from Bank of Mum and Dad
Not all parents may be in a position to gift the money so they may choose to loan the deposit amount. The difficulty with this option is that many mortgage lenders will take this loan into account They may then only grant a loan with less favourable terms or may not be willing to loan at all, limiting your options.
The terms of any loan would need to be agreed, such as when the loan is repayable, whether any regular payments are required and whether any interest is due on the loan amount. The parents may pay income tax on the interest earned. This loan should be recorded in a formal agreement setting out the terms and both sides should take independent legal advice on how best to protect this loan as there are a number of options open to them.
The Joint Purchase
A third option is for parents to jointly purchase the property with the child. They can then hold the property as Tenants in Common and a Declaration of Trust can record what shares each own in the property in order to reflect how much each owner has contributed. Joint ownership may secure the parents investment and may help with the mortgage application. However if the parents own their current home this would be considered as a second property meaning that the higher rate of Stamp Duty Land Tax would be payable on completion and First Time Buyer Stamp Duty Relief would be lost.
If you are purchasing with someone else such as a partner you should consider how any contribution from your parents is dealt with if the relationship did not work out. A declaration of trust should be entered into which will determine who is entitled to what on the sale of the property.
There are other options available through lenders. As part of their campaign, Lloyds Bank have started their Lend a Hand deal where a 100% is granted however this requires a family member to put a sum equal to 10% of the value of the property into a 3 year fixed term Lloyds savings account. This is similar to the Barclays Springboard mortgage which acts in a similar way. The Post Office also offers products where a deposit could be secured on a family member’s property in return for a 100% mortgage. A mortgage adviser will be able to advise you on whether these products are best suited to your circumstances.
If you are a first time buyer looking to purchase your first property or are a parent wanting advice on how to support your children in purchase a property, our expert property team will be able to advise you on all of the options available to you. Call Hayley on 0191 243 8167 to make an appointment.