If you're looking to buy a new home, there's a strong chance you'll approach the UK's 11th biggest lender. Not a bank or a building society, the so-called Bank of Mum and Dad will lend more than £6bn in 2019, more than major lenders including the Co-Operative Bank and the Skipton Building Society.
So how many property purchases does the Bank of Mum and Dad (or grandparents) support? And what's the average amount that family members lend? Keep reading to find out, as well as a complete guide to what you need to know if you're thinking of lending to your children or borrowing from your parents.
Bank of Mum and Dad set to lend £6bn in 2019
New research from Legal & General and Cebr has found that the Bank of Mum and Dad will lend £6.3bn in 2019, up 10% from 2018’s total of £5.7bn. This makes it the 11th largest mortgage lender in the UK, just behind the TSB.
The average contribution from family members is now £24,100, with the Bank of Mum and Dad now involved in more than a quarter of a million (259,400) property purchases. It means that borrowers are leaning on parents and grandparents in almost one in five (19%) of all property transactions in the UK.
In total, the Bank will help buyers to purchase property worth nearly £70bn this year.
In terms of the contributions:
- £4.4bn will come from parents
- £657mn will come from grandparents
- £1.2bn will come from other family members/friends
Most Bank of Mum and Dad lenders use cash savings to help, but 16% will use the equity in their own homes to provide the cash to buyers.
Those aged 35 and under are most reliant on parents with 62% needing support from family or friends, while 22% of people aged 45 to 54 have also received financial assistance from relatives.
Nigel Wilson, Group Chief Executive at Legal & General, says: “The Bank of Mum and Dad continues to be the ‘iceberg’ mortgage lender beneath the surface of our housing market – all but invisible yet exerting a massive influence, funding purchases across the country and helping people to defy the economics of affordability and realise their housing dreams.”
It's clear that the Bank of Mum and Dad is playing a key role in the housing market. So, if you’re a parent thinking of supporting your children, or you’re considering asking the Bank of Mum and Dad for cash to help you buy a home, here’s what you need to know.
Read: First-time buyer? 7 tips to finding the right home for you
Am I allowed to gift money to my child to help them to buy a home?
Yes. More than half of family lenders use cash savings to help their children with the deposit for their home.
Banks and building societies will typically accept a deposit that has been gifted from a relative, although some may require confirmation that it is a true gift. This is because they want to know that:
- The money isn’t a loan that requires regular repayments
- If they have to repossess the property, you don’t have an interest in it.
Remember that if you do gift cash to your child then Inheritance Tax (IHT) could be due if you die within seven years of the gift.
You are allowed to gift up to £3,000 a year, and you can use any allowance from the previous financial year. So, two parents could theoretically gift £12,000 without IHT being a problem, if you hadn’t made any other gifts in the previous two years.
If your child is buying with a partner or friend, you may also wish to protect your money in case they split up or fall out.
You can do this through a declaration/deed of trust, which can be drawn up by the solicitor dealing with the property purchase. This deed specifies who the money was gifted to, so you can specify you gave it to your child and not their partner. Note that if your child goes on to marry their partner, this could affect the declaration of trust.
Read: Everything you need to know about getting a mortgage if you’re over 55
Can I loan money to my child to help them buy a house?
Yes. If you don’t (or can’t) gift money to help your child or grandchild with their deposit, you can lend them the money.
You’ll need to draw up a loan agreement which details:
- Any interest that is payable on the loan
- When it needs to be repaid (for example, when the property is sold)
- What happens if anyone involved in the loan dies
- What happens if the parents/grandparents need the money back
The loan will need to be declared to a mortgage lender and, as not every lender will accept a loaned deposit, it could affect the choice of mortgage deals.
A loaned deposit could also alter the amount of borrowing. A lender will take the loan repayments into account when calculating affordability and this may reduce the potential mortgage available.
The pros and cons of using the Bank of Mum and Dad
Pros
- You can put down a bigger deposit and therefore benefit from a lower interest rate and lower monthly mortgage repayments
- You could afford a better property
- The gift could help the parent/grandparent to reduce the size of their Inheritance Tax bill if they live for seven years after making the gift
Cons
- If your child splits up, the other party could end up taking half your gift (unless you use a declaration of trust – see above)
- You may have to evidence proof of funds to a mortgage lender
- Some lenders may not accept a loaned deposit, reducing your choices
- Lending to one child might set a precedent for other children, and family arguments could occur
- You could lose valuable savings or equity in your home, leaving you short of money in the future.