The BBC recently reported that the Bank of Mum and Dad lent £6.3bn in 2019, making it the 10th largest mortgage lender in the UK.
But there are risks to lending large amounts. It can lead to parents downsizing, delaying retirement or eating into a pension income. This is Money suggests that parents are leaving themselves worse off – by £18,000 on average – to support their children, with almost one in five sacrificing their standard of living to help their children onto the property ladder.
Read our guide to the top ways you can help provide a house deposit for your children, whilst maintaining your standard of living.
What is the Bank of Mum and Dad?
Since the 2008 financial crisis, house deposits have grown significantly. A report in the Money Observer confirms ‘an increase of more than 94%’ since 2017, suggesting ‘it would now take 18 years for the average person aged between 27 and 30 to save for a deposit.’
In the face of those sorts of numbers, millennials are increasingly turning to their parents to help them onto the property ladder. The BBC reports that the ‘average parental contribution for homebuyers [in 2019] is £24,100, up by more than £6,000 compared to last year’.
So, if you’re looking to help your children onto the property ladder, where is the money going to come from?
Here are some of the options available to you. These aren’t suitable for everyone and there are alternatives to the Bank of Mum and Dad. These should be explored thoroughly before you make a decision. Speak to your adviser if you’re unsure.
How to access the money you need
1. Use your property
If you’re under 55 you might consider remortgaging to release equity in your home.
Remortgaging isn’t something to take lightly, there will be costs attached to applying for a larger mortgage but it could release the funds you need. If you have taken the necessary advice and can afford it, it’s an option worth considering.
If you’re over 55, you may be able to use equity release. There are two options, home reversion and a lifetime mortgage.
With a lifetime mortgage, you take a loan but don’t make repayments. Instead, interest builds and, along with the amount borrowed, is taken from your estate when you die or enter long-term care. With a lifetime mortgage, you still own 100% of your home.
A home reversion plan involves selling all or part of your property to a scheme provider. They pay you a tax-free lump sum in return with no interest to pay. But you no longer have sole ownership of your house and the provider will take their share back out of the value of your home once it is sold. The remaining percentage goes to your estate.
Taking financial advice before making this decision will give you the peace of mind that the choice you make is the right one for you and your family.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Equity Release will reduce the value of your estate and can affect your eligibility for means-tested benefits.
If you’ve planned your retirement you may well have already factored in downsizing. Selling a large house to release income can be a liberating decision.
Whether your retirement planning assigns the funds to round the world trips, the cost of care in later life, or to helping your children onto the property ladder, your standard of living needn’t be affected if downsizing is part of your plan from the outset.
2. Take money from your pension
With good financial planning, you may well have factored additional costs into your retirement budget, the cost of later life care for example, or contributing to a child’s university fees and helping them onto the property ladder.
If you have a plan, great.
But according to This Is Money, you are in the minority. The strain placed on the Bank of Mum and Dad is ‘most likely to be felt by those between 55 to 64’. The research goes on to suggest that more than three-quarters (77%) didn’t seek financial advice before they lent money.
Taking a lump sum from your pension is certainly one way to release a large amount of money in one go and, since 2015, it’s become even easier.
Pension Freedoms allow you to access the whole of your pension fund as a lump sum, with 25% paid tax-free and the rest taxed at your marginal rate. Doing this would free up the cash you need but remember that your retirement fund is designed to provide you with income for the rest of your life so be sure you can afford it.
Depending on any other income you have, your pension fund may need to last you for the rest of your life. Taking a lump sum will also trigger the Money Purchase Annual Allowance (MPAA), limiting the amount you can invest in any other pension schemes you have.
If you’re unsure whether your current pension planning foresees this kind of expenditure, speak to us now.
3. Take money from other investments
If you’re under 55, or if your pension savings have already been designated elsewhere, you might want to fall back on other investments you hold.
ISAs, bonds or regular savings could all be cashed in or withdrawn to raise the needed capital but be aware of possible charges and tax implications.
Surrender charges might apply when withdrawing from bonds and some investments. You might also be liable for Income Tax or Capital Gains Tax (CGT).
Speak to us if you’re unsure of the implications of taking money from your investments.
How to provide the money to your child
1. A loan
A loan may be the simplest way to give your child the money they need. It allows you to keep an element of control over the money, and by opening discussions at the point of lending it should make it clear how and when the amount is to be paid back.
Remember that a loan still counts as part of your estate for IHT purposes. You might opt to gift the money instead, but the amount only becomes IHT exempt if you live for at least seven years after making the gift.
2. Inheritance Tax (IHT) gifting
The HMRC ‘Annual Exemption’ allows you to gift up to £3,000 a year tax-free. Gifts can include money or possessions and the £3,000 limit applies per individual, meaning couples can gift up to £6,000 a year which could go to your child.
The exemption can be carried forward for one year too, so if you and your spouse didn’t use your exemption during the last tax year (2018/19), you could gift £12,000 as a couple.
This provides a sum of money for your child, tax-free, whilst also taking that sum out of your estate for IHT purposes. This might not give you the large sum you need, if you have already made your gifts for the tax year (or if you made your gifts last year) the amount of money you can gift will be significantly reduced.
3. A family mortgage
A family mortgage is a home loan where your savings are held in a linked bank account and used as the deposit for a child’s mortgage.
You still benefit from the interest on your savings and your child doesn’t have to provide a deposit.
After a fixed period (usually five years), your savings will be returned to you, as long as your child has kept up to date with their mortgage repayments. This option will leave your savings committed for that fixed period but you should get the amount back with interest if the mortgage is well managed. Not all lenders offer family offset mortgages, though, so you need to hunt around.
Seek legal advice
An FTAdviser report recently confirmed that ‘only 8% of parents who gave money to a child for a deposit sought advice from a financial adviser, while only 14% took legal advice’.
The article goes on to say that ‘there are usually no written records of transactions or arrangements for repayment’ and that families are even ‘failing to make clear whether the money is a loan or a gift.’
Money can be a difficult topic to discuss with family but it’s essential the basics are discussed and that legal advice is also taken. Engaging a solicitor to document the loan or gift will help protect you, should something go wrong, the break-up of a relationship, for example.
Taking the time to work through these things at the outset will save undue stress and potential financial difficulties further down the line.
If you’d like to discuss providing a nest egg for a child or grandchild, please get in touch. Please email firstname.lastname@example.org or call 0115 933 8433.
The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be regarded over the longer term and should fit in with your overall attitude to risk and financial circumstances.
The value of tax reliefs depends on your individual circumstances. Tax laws can change.