Have you heard of The Bank of Mum and Dad? It’s been around for as long as any of us can remember, but from humble beginnings – 50 quid to buy a car back in the 60s, £250 toward a wedding in the 70s, perhaps £500 toward the deposit for a flat in the 80s – it has grown out of all recognition to become what would on paper be a UK top 10 mortgage lender.
Lending from parents to help their children get on the UK property ladder will amount to a staggering £5 billion in 2016, according to Legal & General. It means the Bank of M&D will help to finance a quarter of all UK mortgage transactions this year – at an average amount of £17,500.
Without The Bank of M&D it’s hard to see how young people (and the not-so-young: the average age of a first-time buyer in the London area is 32) living in this affluent part of the UK could take their first steps on to the housing ladder.
In fact, a study out this week from another insurance giant, Aviva, forecasts that by 2025, 3.8 million people aged between 21 and 34 will be living at home with their parents – that’s a third more than at the moment.
The study also forecasts that the number of households containing two or more families is also expected to rise, from 1.5m to 2.2m. Aviva’s figures assume house prices will continue to rise t the same rate they have done over the past 10 years.
Still better than renting
At KWW, we are seeing more and more instances of generous parents providing that essential financial boost, often as much as 10% of the purchase price.
“House prices may be very high,” said one of estate agent contacts “but mortgage repayments are still less than rental payments and owning a property even with a large mortgage gives the kids an investment rather than paying out dead money.”
If you are a parent or family member looking to help your loved one into their first home, there are some important things to consider from the outset.
Gift or Loan?
It is important the family member who is offering the helping hand confirms whether the financial assistance is a gift or loan. It is sometimes difficult to distinguish between the two.
A gift is essentially where the financial assistance is given with no strings attached. This effectively means the family member assisting financially (we’ll call them the ‘donor’) does not impose any conditions on the funds being paid back and will not legally have any interest in the property.
So if the donor might want their money back on the future, this may not be the route to choose.
A loan is where the financial assistance is repayable. If the money is repayable, the donor should first consider how the money is repayable (for example, how often, over what term and will there be interest on the loan) and second, whether a charge needs to be registered against the house to protect the donor’s interest.
A charge is a legal document which will set out the terms of the loan. KWW can help you with preparing and registering the charge with the Land Registry on completion. Where a charge is registered against the property, consent would be required by the charge holder (the donor) in order to remortgage or sell the property in the future.
If, however, the purchase is also going to be with the aid of a High Street mortgage, consent is required from that lender to register a second charge and is often not granted for fear of the borrower being overextended financially.
A registered charge will protect the interests of the donor in the event of future family disputes, marriage or family breakdown/divorce.
Parents or family members often assist with mortgage applications, helping to increase the amount mortgage companies are prepared to lend. In this situation the donor usually becomes a joint owner of the property.
There are two ways you can own a property jointly in England & Wales – as joint tenants or tenants in common.
As joint tenants, in the event of the death of one of the owners, the property will transfer to the surviving owner regardless of what it says in the deceased owner’s will or under the rules of intestacy.
With tenancy in common, on the death of one of the owners, the share does not automatically pass to the surviving owner but according to any valid will or otherwise the rules of intestacy. Because the shares are distinct, the tenants in common can hold unequal shares in the property. KWW can prepare a Declaration of Trust, which is the legal document that sets out how those unequal shares are held by each owner.
Another important thing to consider if you are buying a property with your child or a family member is whether either of you is likely to own another property anywhere else in the world at some point in time. If this is the case, you may be liable to pay the higher rate Stamp Duty Land Tax on completion, being a second home owner.
If you are purchasing jointly with a mortgage, you must understand that you are equally responsible for full repayment of the loan, not just a share of it, regardless of how you jointly own the property.
So, using an example, if mum and dad are purchasing a property jointly with their son with a mortgage and the son is to live at the property and repay the mortgage, if he fails to make the repayments on the mortgage then his parents are equally responsible for the full repayment, including the balance of the loan (not just a proportion of it).
As house prices in the UK continue to rise, we expect to see more and more instances of Bank of Mum and Dad stepping in to help.
We’re always pleased to see families coming together to help dreams come true but we would urge a great deal of thought to go into the decision-making process and the appropriate legal steps to protect everyone’s peace of mind.