5 practical issues the Bank of Mum and Dad should consider before lending

Are you considering lending a financial helping hand to an aspiring homeowner? If you want to help someone to get on the property ladder, here’s what you need to know before you put your hand in your pocket.

Dubbed the “Bank of Mum and Dad”, family support has become vital for first-time buyers as rising property prices mean that many young adults struggle to save a deposit to purchase their first home.

More families are stepping in to lend financial support – indeed, research from Savills shows that almost half of first-time buyers in 2021 received some family assistance in getting their mortgage.

The survey estimated that, in the three years to 2024, nearly half a million first-time buyers will benefit from help totalling £25 billion.

It’s not just parents lending support either. As rising inflation puts pressure on household budgets, grandparents are increasingly likely to help younger generations get on the property ladder.

According to an Aviva poll, 5% of grandparents said they had already helped grandchildren buy a home. A further 20% said they are “definitely” or “probably” going to in the future.

If your child or grandchild is struggling to buy a home, there are some things you need to do before you hand over a deposit.

1. Check how much money they need and how they will use it

Before you offer support, you should check how much your child needs and how they intend to use it.

The amount needed for a deposit may be higher than you expect. The Halifax House Price Index found that the cost of a typical property in the UK was £293,221 in June 2022. Assuming a first-time buyer needs a 10% deposit, that would be almost £30,000.

First-time buyers may also need help with other costs, such as solicitor fees, survey costs, mortgage fees, and a budget to purchase furniture for their new home.

Having a conversation about how much they’ve already saved and the amount they will need can help ensure you’re all on the same page.

2. Decide if it will be a gift or loan

While the Bank of Mum and Dad is often associated with gifts, many families loan the money to buy a property. Reviewing your finances and long-term plans can help you decide if a gift or loan is right for you.

If you have capital available now but will need it later, such as to fund retirement, you may want to consider a loan.

When loaning money, make sure you’re clear about your expectations and the terms:

• What repayment schedule will your child need to stick to?
• What will happen if they can’t meet the repayments?
• Will you charge interest?

Going through these details may be a bit formal when you’re helping your child, but it can mean you avoid misunderstandings. You may also want to take legal advice to put a formal agreement in place.

3. Discuss how relationship breakdowns could affect your gift

If your child is buying a home with their partner, you should think about what would happen if the relationship broke down.

While it’s something that can be difficult to discuss, it’s an important conversation to have with your child.

According to a report in FTAdviser, law firms have seen more parents encouraging children to sign a prenuptial agreement before they get married. However, keep in mind English courts can still make an order contrary to the terms of a prenup.

Another option is to loan the money, rather than gift it, which could be a liability if they divorced.

You may also want to consider working with a solicitor to draw up a declaration of trust, which states the money was gifted to your child and not their partner. A living together agreement or tenancy agreement may also be appropriate if someone else will be living at the property.

4. Consider if it will affect your long-term financial security

If you’re in a position to offer support, your instinct may be to help. However, you should consider how it affects your financial security too.

Would taking a lump sum out of your assets now affect your lifestyle or long-term plans? Would you still have enough to cover unexpected costs later in life?

Arranging a meeting with a financial planner to discuss your plans to gift or loan a deposit can help you understand the implications. It means you can offer support with confidence.

5. Review your estate plan

Providing a gift to a family member now may affect how you want your estate to be distributed. So, you should review your will and estate plan.

According to a report in MoneyAge, almost half of adults don’t want to split their wealth equally among their children when they pass away. One of the most common reasons for this was because they’d take financial support that had already been given into consideration.

If you’ve gifted a house deposit to one child, you may want to leave a larger sum to your other child in your will.

Contact us to calculate the financial support you could lend to first-time buyers

If you want to lend financial support to your loved ones but worry about the effect it could have on your future, we can give you confidence. We’ll help you make it part of your financial plan alongside other goals you have.

Email us at enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100 to talk to us about your plans.

Please note

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.

The Financial Conduct Authority does not regulate tax or estate planning.