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Bank of mum and dad

One of the most important decisions when you are looking to buy your first home is working out whether you can afford it – and that doesn’t just mean keeping up the monthly mortgage repayments.

Bank of mum and dad


The fact is that purchasing a property involves a lot of up-front expenditure and many homebuyers – not just first time buyers – underestimate the  amount of money involved or neglect to account for some aspect of the fees and costs that come with buying a new home.

Can you afford to buy a new home?

When you buy a new property the initial costs typically include:

These costs can vary depending on your circumstances. For example, stamp duty is currently only charged on property purchases over £125,000,and to an extent, it’s possible to shop around to find the best price on  costs like solicitor’s fees. However, the largest of these costs –the property deposit – represents a considerable outlay, and one that more and more people are finding it difficult to save for.
 



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The deposit

The days of lenders offering 100 per cent mortgages are long gone, and that means that if you want to buy a property, you will have to put down a deposit of at least 5 per cent of the purchase price. Because of the way lenders price their mortgage products, you’ll also find that if you want to qualify for better deals you may have to pull together a deposit of 15 to 20 per cent, or more.

Low savings interest rates and other economic pressures in recent years have made it difficult for many prospective homebuyers to save up for a property deposit – in May 2015 the average first time buyer deposit was £25,134. While the government’s Help to Buy ISA, which launched in December 2015 and the Lifetime ISA, which is launching in April 2017, will give a boost to those saving to buy their first home, many first time buyers are grateful for the generosity of parents and grandparents in helping to build a deposit.

The “Bank of Mum and Dad”

In the past decade it has become more and more common for homebuyers, and particularly first time buyers, to receive a contribution from parents or other family members towards the deposit for their first home.

Lloyds Bank calculated that on average, parents spend approximately £8 billion a year on helping their children buy a home, and that almost a fifth of homeowners consider asking for support from friends and family to help fund their second house move.

Research commissioned by solicitors Slater & Gordon shows that the average amount loaned or given to adult children to buy their first home is now around £18,505.

It's also becoming common for parents to act as guarantors for home purchases to boost the amount that can be borrowed for a first time purchase. However due to added stamp duty charges for second-home purchases, a first-time buyer will have to pay an additional 3% on their Stamp Duty charge. 

The right approach

Accepting money, whether as a loan or a gift, can sometimes be difficult for both parties involved, especially if parents feel pressured to help out or have to make certain sacrifices in order to do so. Similarly, those on the receiving end of the offer can end up feeling in debt to their parents which can cause a strain on the relationship.

For both parties, it is best to be open and clear about the arrangement. Is the sum of money a gift or is it a loan? If it is a loan, is there a formal or informal agreement about how and when it will be repaid? If it is a gift, have both parties acknowledged that there will be no repayment?

While most families tend to take an informal approach, don’t discount the idea of taking legal advice or drawing up a contract – for example agreeing what will happen if the couple buying the property split up further down the line.

The Telegraph offers advice about how parents can help their children save for their own home, and My Home Move Conveyancing provides the following great tips:
 
1. Inform your conveyancer – As soon as your officer is accepted, ensure the conveyancer is aware that some or all of the deposit is a gift.
 
2. Provide evidence that the money was a gift and not a loan – When giving a gifted deposit, the lenders will need written consent – often as a letter or part of a form – confirming the money was a gift and the provider has no personal interest in the property.
 
3. Ensure you have the right proof of Identification – This may sound simple, but quite often photocopies of ID will not be accepted by a solicitor. This can become problematic if the person giving the gift is either overseas or unavailable.
 
4. Have the necessary bank statements at the ready – Part of the process involves anti-money laundering checks which includes checking bank statements from the person giving the gift and the recipient, to confirm that the money was earned legitimately.
 
5. Understand what a gifted deposit means for you – Most importantly, if you are the contributor of a gifted deposit, you must be aware that once you complete the process, you no longer have any rights to the money or the property.
 
Family disputes over ‘borrowed’ money are not uncommon, however it’s important to ensure that everyone knows where they stand prior to any money being given.
 
If there is no written agreement and you take legal action in the future, the court may decide that the payment was a gift and a repayment might not be an option. Similarly, if the payment has been recognised by both parties as a loan, there could be complications with the impact of the Consumer Credit Act 1974 if you’re trying to recover possession or payment of the property (if the borrower is failing to repay the loan).
 
Bear in mind that gifting an amount of money isn’t as simple as transferring a payment into a bank account. There is a gifting process that will need to be followed, and both parties should be made aware of the tax implications (inheritance tax) that are involved in gifting money.
 
To save any potential family-fallouts and prior to the arrangement, both parties need to decide on the amount of money being borrowed, the type of payment on offer and whether or not it needs to be repaid.
 
Purchasing a new home should be an exciting time, and you should try and prevent financial issues coming between you and your family. If, however, you can’t come to an agreement together or you’re worried about the amount of money that will need to be repaid, seek legal advice and draw up a legal contract to ensure both parties agree to the terms and conditions of the loan.
 
Alternatively, if you are considering buying a property with extended family or friends, read our article on buying a house with friends.

Updated February 2017

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