This article considers new ways in which people can enlist their parents' help towards paying mortgages. It looks at the advantages and risks of new models, such as a "guarantor mortgage" – a topic that is clearly relevant to the HNW private client advisory industry.
The expression “the bank of mum and dad” – relating to how young adults often rely on their parents’ money to obtain a house – is well established. It speaks to how, for many people, obtaining a mortgage these days is very hard, given that prices are at high multiples of net earnings. Central bank QE, planning restrictions (a hot political topic) and, arguably, net immigration and changing household composition, have created a “perfect storm” of unaffordable housing and an increasingly frustrated young adult population. This tips over into politics, and affects whether people can afford to start a family, change jobs, etc.
The concept of “bank of mum and dad” is changing, however. Vanessa Duff, partner at Charles Russell Speechlys, considers a second iteration of the idea and what this means. The editors are pleased to share these views with readers. The usual disclaimers apply. Please jump into the debate if you wish to respond to any of these points. Email email@example.com
With it becoming increasingly difficult for young people to get on the property ladder due to high interest rates, lack of affordable housing, and the need to find a significant deposit, it is unsurprising that parents are asked to help their children buy their first home. This has been a long-standing practice not just in the UK, but across the globe.
Trying to obtain a mortgage when moving to a different country where there is no credit rating, residency, or employment history can also be difficult, if not impossible. Post-Covid, many people are reconsidering their choice of residence and couples who have lived abroad for many years may be seeking to return to their home country.
Recently published figures in the UK show that over 318,000 homes were purchased with financial support from family members this year alone, with the average financial support coming in at £25,600 ($31,758).
However, it is not stopping with the bank of mum and dad. Grandparents, and more affluent older siblings are also now being 'recruited to the cause' to help provide deposits when mum and dad may not be able to help.
As home ownership has declined through the generations, fewer parents are in a financial position to assist, hence the call for help from siblings. So far in 2023, siblings have accounted for 11 per cent of all family financial aid given to first-time buyer deposits in Great Britain – more than double that recorded five years ago (5 per cent) (1).
Making such gifts can place significant financial stress on older family members, particularly if they have to withdraw equity from their own homes to pass on to their children or grandchildren, or they rely on savings which were intended for their retirement.
Issues to be aware of
One question which can arise is what happens to those funds in the event that the family member to whom the gift was made goes through a divorce. If the funds went into a property which subsequently became a family home, and the marriage lasted many years, the property may need to be sold and at least half of those funds may be lost to the other spouse.
Alternatively, depending on whether there are other assets owned by the couple, and considering the housing needs of the parties and any children, the property may be transferred in its entirety to the other spouse.
Where significant funds have been provided, it may be sensible for the recipient of the funds to consider a prenuptial or post-nuptial agreement to ensure that in the unfortunate event of a divorce, the family funds provided to buy the home are kept in the family and not divided with the other spouse.
Alternatively, other structures should be considered, such as the parents or sibling taking a legal and/or beneficial interest in the property equivalent to the funds advanced, or the money simply being loaned, rather than gifted, with a clear loan agreement in place.
Gifting a lump sum is the most popular option when it comes to families helping first-time buyers. However, cash gifts of more than £3,000 in a year could be subject to inheritance tax (IHT) in the UK if you die within seven years of making the gift.
It is important to take expert advice before committing to any sort of financial support and to have proper documentary evidence in place, and a clear paper trail to show the source of funding. In the event that the funds are simply being loaned rather than gifted, in order to avoid any allegation that a family loan was a “soft loan” which would not be enforced, a proper loan agreement should be put in place. Having a written document setting out repayment terms and provisions regarding the payment of interest and what happens in the event of default can have a significant impact if there is an argument about whether there was a genuine intention that the loan would be called in.
Another option is to obtain a “guarantor mortgage,” also known as a family-assisted mortgage. This is where the family member agrees to take on responsibility for repayments if you cannot meet your mortgage payments. It may place less pressure on the family member as no cash is being advanced.
However, this does make the guarantor jointly liable for the mortgage and means that the bank can and will pursue them for the debt should the main borrower fail to pay. This can include having the property repossessed to repay the mortgage, placing pressure on the family relationship.
Whatever decision is made, it shouldn’t be taken lightly as each of these options can have a big impact on the finances of family members and the buyer in question.