We often hear about the difficulties faced by first-time buyers trying to take that first step on to the property ladder. In many respects, the property market has adapted over time in recognition of this, but whether you feel that options including shared ownership, the Help to Buy initiative and specialist mortgage products go far enough will be a matter of personal experience. However, if you’re faced with the challenge of buying your first home, a solution may be closer than you realised.
According to recent studies, the so-called ‘Bank of Mum & Dad’ is now the UK’s 9th largest mortgage lender and whilst it won’t be an option for all first-time buyers, if this is a path that you’ve toyed going down, you’d be well advised to do your homework first. Here’s our advice on what you should consider.
The first thing to bear in mind is that the Bank of Mum & Dad can take a number of different forms and you’ll need to consider your own situation (and that of your parents or other willing friend or relative!) to gauge which is best for your own circumstances. It is at this stage, before you make any potentially life changing decisions, that you should seek expert advice from a financial advisor who will objectively consider the pros and cons of each option, for all parties involved.
So that you’re prepared for that conversation, however, there are a few options which you may wish to consider. Firstly, whether a financial transaction linked to the deposit should be a gift or a loan and if the latter, whether interest will be charged.
The advantage of gifting the money is that for the purchaser, they’re likely to be able to bring their purchase forward and proceed more quickly than if they’d had to save up for the deposit themselves. The downside for the parents or other donors, however, is that their cash reserves, which they’ll have no doubt built up over many years, will be quickly depleted.
The Bank of Mum & Dad can, however, also be utilised in other ways and both equity release and loans against existing family properties can prove advantageous in this respect – depending, that is, on the individual’s circumstances.
In the case of releasing cash from the family home via equity release, the impact to both the parents and other family members further on in life needs to be factored in to avoid surprises and disappointment at a later stage.
Another option to potentially consider would be purchasing the new property in joint names with both the first-time buyer and parents appearing on the mortgage and title deeds. However, with changes to taxation around owning more than one property having come in to force in recent times, any parent considering this option should seek expert legal and financial advice to fully understand the tax implications of owning two homes.
With the range of options fully considered, there’s another major question to ask yourselves and that is whether tapping in to the Bank of Mum & Dad is likely to place undue stress and strain on this important family relationship, especially if personal circumstances on either side alter in the future.
The importance of the Bank of Mum & Dad in today’s property market can’t be underestimated and its future importance is unlikely to wane. However, in the same way that a ‘traditional’ financial agreement would be entered in to with safeguards, due diligence and necessary checks and balances, it is prudent to seek both expert financial and legal advice before assuming that this could be an easy option for gaining access to the property market.
If this path to owning your first home is something you’ve considered, or you’re just keen to discuss your property and financing options with an expert, then visit your local Andrews office or visit www.andrewsonline.co.uk for expert advice and guidance.