- On July 23, 2017
With first-time buyers finding it harder than ever before to get on the property ladder, 2017 looks to be a record year for children tapping into the Bank of Mum and Dad (BoMaD) to buy a house.
It’s an instinctive reaction for a parent to want to help their children, but before you start handing over your life savings you need to think very carefully about whether you can afford to.
In 2016 the BoMaD supported the purchase of £77 billion worth of property, according to financial services giant Legal and General, the equivalent loan value of the UK’s ninth biggest mortgage lender.
Parents contributed to 256,400 house purchases, with an average contribution of £17,500. In 57% of cases the help was in the form of a cash gift, children were loaned the money 23% if the time, either with or without interest, and the rest received help through a combination of the above or other methods.
A key concern in the property sector is that if things continue as they are by 2035 the average BoMoD loan will wipe out more than half of a family’s available wealth. This means that it’s likely today’s young parents will not have the necessary funds to help their children in the future.
Think long term
When it comes to affordability, you need to think about the long term, not just your present financial situation. What happens if you realise at some point in the future that you need the money you gave your children?
It’s crucial that you carefully consider all the implications of setting yourself up as the BoMaD, both now and in the future, and plan your cash flow accordingly. An independent financial adviser can help you do this.
If you decide to go-ahead and help these are some of the options available to you:
- The simplest and most obvious route is to give your children cash. There are no immediate tax implications but if you die within seven years of the gift and your estate is worth more than £325,000 there could be an Inheritance Tax liability.
- You could loan them the money and charge interest but this may limit your access to mortgage deals because banks will view this differently to an outright cash gift.
- You can offset some of your savings against the value of your child’s mortgage which will reduce their interest payments. The money is placed in an account with the lender. The cash will not earn interest and you won’t be able to touch it until the end of an agreed period.
- Although relatively uncommon these days, guarantor mortgages enable you to act as guarantor to your child’s mortgage debt, but you have to be sure you can afford to pay it if they can’t.
- Buying a property with your child is also an option, but this can be an expensive route as for many parents this will be classed as a second home and will attract a higher stamp duty rate and Capital Gains Tax when the home is sold.
If you do decide to gift money to your children then protecting your family’s assets in the event of divorce or other major life changes becomes important.
After all, you wouldn’t want to see a large chunk of that £50,000 you’ve just given to your child disappear out of the family if they separate from their spouse.
You will need to consider setting up what’s known as a bloodline trust to protect this capital. These can also offer protection in the event of bankruptcy.
It is important to remember that the value of your investments can down as well as up.
For a free consultation about your financial needs call 0118 974 0159 or email email@example.com.