Wed 30 Aug 2023
Every year, the Bank of Mum and Dad swoops in like a superhero to save the day for countless first-time buyers who are desperately trying to climb onto the elusive housing ladder. It is like a secret alliance of parents, armed with financial assistance and unwavering support, ready to combat the relentless struggle of sky-high property prices. Let’s face it, without this legendary institution, many of us might still be confined to the world of renting or living with our parents indefinitely.
But who exactly is this Bank of Mum and Dad? Well, it is not an actual bank with a physical building or tellers behind glass counters – although that would be cool. No, it is simply a term used to describe the incredible generosity and sacrifices that parents make to help their children purchase their first home. They become their children's personal bankers, offering loans or outright gifts to bridge that daunting deposit gap.
The Superheroes Behind the Scenes
The Bank of Mum and Dad would not exist without its selfless and financially savvy superheroes – the parents themselves. These amazing individuals often dip into their own savings, remortgage their own homes, or even take out loans themselves just to aid. They understand that buying a house in today’s market is akin to running a marathon without shoes on – challenging and painful! So, they step up to ensure their kids can experience the security and pride that comes with owning a place they can truly call home.
It Takes a Village
But let us not forget that sometimes it takes more than just Mum and Dad to make this superhero alliance work. Many grandparents also join forces in this epic battle against unattainable property prices. They offer additional financial support so that their grandchildren can break free from the shackles of excessive rent payments or cramped living arrangements. It truly takes a village of loved ones working together to help these young dreamers achieve their homeownership goals.
Fighting Against Astronomical Prices
In a world where house prices are skyrocketing faster than Elon Musk's rockets, the Bank of Mum and Dad serves as a formidable opponent to the financial challenges faced by first-time buyers. With property prices sometimes reaching astronomical heights, it is no wonder many aspiring homeowners struggle to afford that daunting down payment. But fear not, dear readers, because the Bank of Mum and Dad is here to equip these brave souls with the necessary funds to slay the dragons of outrageous property costs.
A Lifeline for Generation Rent
For those stuck in the never-ending cycle of renting, the Bank of Mum and Dad offers a glimmer of hope. It is like being handed a lifeline while you are treading water in a rapidly rising sea of monthly rental payments. With their financial backing, those drowning in exorbitant rent costs can finally grasp onto the life raft of homeownership and sail towards shores filled with stability and investment opportunities.
According to the most recent research conducted by the real estate company Savills, the combined value of financial assistance received from parents in the form of gifts and loans amounted to 8.8 billion pounds in 2022.
In 2022, a total of 170,000 first-time buyers obtained a mortgage with the assistance of family members. This represented approximately 46% of all first-time buyers who obtained a mortgage. This percentage reached a high of 198,000 in 2021. On the other hand, projections indicate that by 2023, this percentage will have increased to 61%, a level that has not been seen since before the introduction of the Help to Buy program. This indicates that only about one-third of first-time buyers will be able to enter the market without the assistance of any third party. (Source SAVILLS)
However, before helping one's children, either by a parent or another adult, a few things should be considered first.
Giving money as a gift
Before making a one-time cash gift, parents should carefully consider their financial situation to ensure that they will have adequate reserves if their circumstances change in the future. If they want to avoid paying inheritance tax (IHT), parents should ensure they fully comprehend the intricacies of IHT and the rules that apply in this context.
The purchasers are responsible for disclosing that they have received assistance from the "Bank of Mum and Dad" to their legal counsel and mortgage broker.
To comply with the regulations regarding the prevention of money laundering, parents must present identification and verify the origin of the funds. The bank may require written proof that the money was given to you as a gift.
If their child is buying something from another person, many parents will take precautions to protect the money they contribute.
A deed of trust can safeguard the money if a solicitor manages the transaction. This ensures that the funds will be set aside for your child if the couple later decide to divorce (it is unpleasant to consider, but it is essential to take precautions).
Giving money as a loan
If you lend money, you must have a clear repayment plan (ambiguity can lead to conflict).
The buyer is responsible for informing the lender that a portion of their down payment comes from a loan. When determining whether a mortgage is affordable, the lender will consider this.
Take on the role of a guarantor.
One more choice is for the parents to take on the role of mortgage guarantor, using either their savings or their own home as security for the loan. Nevertheless, parents need to be aware that if their child runs into financial difficulties, they will be responsible for paying the mortgage – or they risk losing their home.
Joint mortgages, in which a parent or both parents share the cost of the loan with their child, are another option, albeit more complicated. The mortgage burden is then shared equally among all parties; however, the remaining mortgagees are held responsible if one party cannot make payments.
If the parent already owns a property, choosing this option might incur additional stamp duty costs.
If you are considering becoming the Bank of Mum and Dad to help your children purchase a property, here are some steps to consider:
1. Assess your financial situation: Before committing to financially support your children, evaluate your own financial standing. Make sure you have sufficient funds to spare without jeopardizing your own financial stability and retirement plans.
2. Start saving early: If you anticipate that you may need to help your children with their property purchases in the future, it is wise to start saving as early as possible. Create a dedicated savings account to accumulate funds specifically for this purpose.
3. Set clear expectations and boundaries: Discuss openly and honestly with your children about your willingness and capacity to assist them. Set clear boundaries regarding the level of support you are comfortable providing. This includes deciding whether you will provide a gift or a loan, and if it is a loan, establish the terms of repayment.
4. Understand the legal and tax implications: Consult with a financial advisor or tax specialist to ensure you understand the legal and tax implications of providing financial assistance. These professionals can guide you on any tax implications, potential inheritance issues, and other legal considerations.
5. Seek professional advice for major decisions: If your child's property purchase involves complex arrangements, such as joint ownership, co-signing a mortgage, or guaranteeing a loan, it is vital to seek professional advice from lawyers or financial advisors. They can help you understand the potential risks and consequences.
6. Consider alternative support options: If you are unable or unwilling to provide substantial financial support, explore alternative ways to assist your children. For example, you could help them with budgeting, offer advice on property purchases, or co-sign a rental lease.
7. Plan for unexpected circumstances: Prepare for unexpected changes in circumstances by having a contingency plan. This may include having a clear agreement on what happens if the property needs to be sold before your financial assistance is repaid, or if your child is unable to make repayments.
Remember, it is essential to prioritize your own financial security while considering how you can support your children. Open communication, clear boundaries, and professional advice are key to successfully playing the role of the Bank of Mum and Dad.
The Future of the Bank of Mum and Dad
As property prices continue to soar higher than Snoop Dogg at a concert, the Bank of Mum and Dad will remain an essential player in the housing market for years to come. However, it is important that we do not solely rely on this superhero alliance. Governments and policymakers must also do their part in making housing more affordable for first-time buyers. Not everyone has access to this impressive parental bank account.
So, here is to you Bank of Mum and Dad! We raise our glasses high in gratitude for your unwavering support and financial prowess. You have helped countless first-time buyers achieve their dreams while simultaneously keeping therapists everywhere employed by avoiding another year-long stint living with mom and dad. Cheers!
If in doubt. Always seek legal advice.
Butcher Residential in Penistone and Denby Dale.
When it comes to buying, selling, or letting property in the Barnsley, Penistone, and Denby Dale areas, there is no one better positioned than Butcher Residential to support and advise you. Having been in the business of selling and letting homes for over 35 years, let us offer you our years of experience in the local property market.
So, if you are looking for a reliable and active estate agent with an impeccable reputation to market your property, then give us a call as we have a huge client base looking for properties to buy and rent throughout Penistone, Barnsley, Denby Dale, and all surrounding areas.
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