Your Thoughts: The Bank of Mum & Dad

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According to L&G research, the ‘Bank of Mum & Dad’ is the 10th biggest mortgage lender in the UK as buyers, and many fi5rts timers, rely heavily on their parents for support.

In the UK, the average mortgage deposit is around £26,000, the average age to lend is around 30, and the average borrowed money is at £132,100.

Finance Monthly set out to hear from a number of experts in the property, legal and banking fields, and heard Your Thoughts on the Bank of Mum & Dad.

Luke Somerset, Business Development Director, Contractor Mortgages Made Easy:

Generation Z is about to start working. Born just before the Millenium they are too young to remember 9/11 but have grown up in a world filled with political and financial turmoil. They are keen to look after their money and make the world a better place. Along with Generation Y these young people have an entrepreneurial spirit like no other generation before them and many of them are either shunning university to set up their own businesses or are going freelance when they graduate. Generation Y and Z are now joining the 2 million freelancers already working in the UK and we have already seen a 26% increase in the number of professionals aged 16-29 registering as self-employed over the last eight years. But these young people might think that they can never get on the property ladder and are destined to be forever known as ‘generation rent’.

However, the Bank of Mum and Dad might be an alternative option or even saving for a deposit. Let’s face it, saving a deposit is the single biggest hurdle between you and owning your own home. It’s not easy to save a substantial deposit when you’re establishing yourself, but thankfully help is at hand in the form of specialist savings accounts such as the Help to Buy ISA which will assist you in saving the 5% deposit you need to purchase your first home. And things have got better for the Bank of Mum and Dad too! Traditionally if your parents wanted to help you to get onto the property ladder, they would have had to write you a cheque and accept that they’d probably never see that money again.

But today there are a range of innovative products which allow your parents to lend you the money you need to buy your first home whilst ensuring that they’ll see their hard-earned savings back from the bank after an agreed period of time.

Mark Homer, Founding Partner, Progressive Property:

As government regulations controlling the type of borrowers which banks can lend to, and the size of the loan as a % of their income bites, many now find the simplest route is to take some of the cash/equity which the older generation sit on in their homes and pass it down to allow those onto the first rung of the ladder.

With the pendulum having swung far in favour of increased bank controls, many believe it has moved too far post the 2008 banking crisis as often happens immediately following periods of crisis. Indeed, there does seem to be a growing consensus that perhaps things could be loosened a little which would allow banks to lend more than 15% of their mortgage book at over 4.5 times income.

As buy to let lending reduces due to stamp duty, tightening lender criteria and the reduction of interest relief bite younger, purchasers are spotting the opportunity to marry family cash with some very cheap bank finance. Often able to secure mortgages at sub 2.5%, many residential purchasers are finding a purchase much cheaper in the long run versus renting.

Jonathan Daines, lettingaproperty.com:

We monitor both the housing and rental market closely and have watched the rise of Bank of Mum and Dad (bomad) steadily grow to where it is today – the ninth largest lender, which is set to fork out £6.5bn this year compared to £5bn in 2016.

But for those who aren’t able to tap into or even unlock the funds of bomad, renting remains the only affordable option which offers flexibility and the chance for tenants to move on as personal circumstances change.

A Which? survey has revealed that 49% of 18 to 34-year-olds regard buying a home as a greater concern than social care costs or energy prices, with some admitting to never wanting to have to tap into parental funds in order to own their own home.

Indeed, as a nation we have always strived to become home-owners, but with prices so high and the demand supply-ratio so out of balance, we have certainly noticed that generation rent is here to stay, with longer-term tenancy agreements more popular than ever in a bid to families in particular feel home from home within their rental property.

Gary Davison, Managing Director, QualitySolicitors Davisons:

As a property lawyer and also a deep-pocketed generous co-director of my very own ‘Bank of Mum and Dad’ (5 to support; I deserve some sympathy, as well as a cold flannel on the forehead at times), I feel suitably qualified to give some guidance on the topic in relation to property matters.

We are Birmingham’s leading conveyancer for residential property purchases according to official Land Registry data, and a significant number of these transactions are on behalf of buyers looking to take their first step onto the property ladder. In recent years a number of our younger clients have taken advantage (quite literally) of the Bank of Mum and Dad in order to secure a larger deposit that grants access to more favourable mortgage rates and cheaper monthly repayments.

For those parents looking to contribute to the deposit, it’s important to be clear whether the contribution is intended as a gift or a loan.

For many parents, their contribution to the deposit is meant entirely as a gift with no intention to claim a stake in the property or recoup the money at a later date. If this is the case, all mortgage lenders will require a deed of gift document signed by the persons gifting the money which confirms that they understand they have no interest in the property and no right to get their money back directly from the property. Gifted deposits will be free from inheritance tax if the donor lives for seven years after the payment is made.

For those parents who intend the money as a loan, one possible option is to take out a joint mortgage with your child. This may help increase their chances of a successful mortgage application, though you may also have to pay Capital Gains Tax when you come to sell the property as it is not your primary residence and if your share is over the annual CGT allowance.

Another option is to create a second mortgage against the property. This would be repaid out of the sale proceeds. However, you would need to gain permission from the mortgage lender first, which may be problematic.

The third option is less formal – a Deed of Trust – which is not registered against the property but sets out the proportions in which the property is held. Many of our clients will be buying with a partner, and whilst parents would happily give money to their own child they may not wish their partner to also benefit in the event of a separation or dispute.

Ultimately, if parents are intending to make any contribution towards a deposit then it is important that they take legal advice to agree on the most suitable course of action.

Shelley Chesworth, Partner and head of the family team, SAS Daniels:

We are increasingly seeing Generation Y turn to their parents to help them get a foot on the property ladder. However, we’re also seeing more frequently, situations that arise as a result of both parties not considering the long-term ramifications of gifting a substantial sum of money. Many are entering into this financial arrangement without giving consideration to inheritance tax consequences or the potential liability for beneficiaries.

Navigating this complex minefield can be tricky. Cohabitees in particular, acting as either a gift provider or beneficiary, need to consider putting certain agreements in place to ensure their gift is protected. For example, a Transfer Deed can protect an investment by expressing particular shares in the property while a Declaration of Trust can be used to set out the parties’ intentions at the time of purchase, so a property can be held in joint names but the trust details how the proceeds should be divided in the event of separation. A Cohabitation Agreement should also be considered as it sets out exactly what was intended as a gift or deposit.

Married couples should also take action. Imagine being gifted a substantial sum by your parents to invest in your marital home, only for the marriage to break down. In this situation the matrimonial assets as a whole will be taken into account and generally divided equally. A Declaration of Trust can be used in this situation but it won’t override the court’s ability to divide the couple’s assets in line with Matrimonial Causes Act. In order to protect parental deposits we’re seeing more people entering into pre or post nuptial agreements – they are no longer just for the rich and famous.

Charles Fletcher, Head of Analysis, Cogress:

The bank of mum and dad is now the ninth biggest lender in the UK with nearly one-third of first-time buyers seeking financial support from their parents. As property prices across the country continue to rise and outpace growth in average earnings, there is little reason to believe this trend will slow down anytime soon.

This year, UK parents are estimated to collectively lend £6.5bn to their children to help them buy their first homes. The bank of mum and dad already provided the funds for almost 300,000 mortgages in 2016, which represented 26 per cent of all property transactions.

Unsurprisingly, the London property market has the highest level of support for first-time buyers from their parents. 40% of homeowners in the nation’s capital have relied on parental finance support to buy their property. With an average house price of £610,418, prospective buyers in London are likely to continue depending on the bank of mum and dad to secure property.

Like any form of loan, lending from the bank of mum and dad is not a risk-free option. Not only can parents go bust like a bank, familial loans can also cause tension in the relationship between the lender and their parents. Problems can often arise due to miscommunication between the two parties, regarding any potential “strings attached” to family financial support such as interest rates, confusion over whether the money is a gift or a loan, and parental concerns about their child’s partner benefitting from their mortgage contributions.

The nation’s rising dependence on the older generation to access the property market highlights not just the current inequities in the market, but also opportunities for developers to create more affordable housing that addresses the needs of today’s first-time buyers across the country

Amy Nettleton, Assistant Development Director of sales and marketing, Aster Group:

The UK’s reliance on the bank of Mum and Dad is borne out of a serious affordability crisis. It’s an unsustainable solution that heavily favours those with parents that can afford to gift or loan them money.

The biggest challenge facing first-time buyers is saving for a deposit. The average house price in the UK currently stands at £218,000[1] and setting aside cash for a £20,000 deposit is proving difficult for the millions of people facing high costs in the private rented sector.

In the absence of a drop in overall values of homes, we need more attainable deposit sizes. The shared ownership tenure has been offering this for over 30 years, with smaller deposits allowing home owners to scale up their equity over time. With affordability affecting a growing cross-section of first time buyers, shared ownership will have to become increasingly mainstream.

At Aster we have pledged to increase the number of homes available under this tenure, but making shared ownership work is about more than just building houses – it needs backing from lenders. Although there has been some progress in recent months, we are still to see many of the big players commit to offering products for the tenure.

While pressure is on the bank of Mum and Dad, we need increased mortgage provision for shared ownership. But there also needs to be a step-change in the way it is viewed – not just as an affordable tenure, but as a viable solution to a problem that affects society as a whole.

We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!

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