With house prices far outpacing wage growth in the past few decades, and rises in the cost of living putting added pressure on savers, more first-time buyers are turning to the so-called ‘bank of mum and dad’ for help.
Increasing numbers of younger people in particular are borrowing money from family to buy a house, with research suggesting that 49% of under-35s who bought a house in 2020 received financial help from family and friends.
If you’re a parent hoping to help your children get on the property ladder, it’s important to give proper thought to the way you do this and what it means for your own finances.
This is how first-time buyers benefit from stamp duty changes
The good news for hopeful buyers and their families is that recent changes to stamp duty land tax (SDLT) have lowered the tax charge on purchasing a first home in England.
This is because the thresholds at which the tax is due have been raised.
As of September 2022, first-time buyers will have no SDLT to pay on properties of a value up to £425,000 (previously £300,000) and only 5% on the excess up to £625,000 (previously £500,000).
Properties with a value above £625,000 aren’t eligible for this discount.
By comparison, the zero-rate threshold on properties that aren’t a first home only goes up to £250,000.
With the average house price standing at £296,000 in August 2022 for the UK as a whole – and £552,755 in London – it’s easy to see how these higher thresholds could provide welcome savings on SDLT for many new buyers.
How can I help my child buy a home?
Some of your main options include:
- Giving a financial gift of some or all of the deposit they need for the house.
- Providing a loan they can repay to you over time. If you choose this option, you may need to confirm the loan details to the mortgage lender, who will consider repayments when calculating affordability.
- Acting as guarantor on a mortgage, putting your own money or property down as collateral in the event your child defaults on their mortgage payments.
- Getting a joint mortgage, which means you will both be named on the deeds and responsible for making the payments.
The advantages and disadvantages of the bank of mum and dad
If you’re planning to help your child with a bank of mum and dad mortgage, it’s important to consider the pros and cons.
Pros of using bank of mum and dad:
- Tax-free gifting: in most cases, giving money to your child for their house doesn’t come with a tax charge. This can have added benefits for estate planning, as it reduces the size of your taxable estate.
- More house-buying options: without a substantial deposit, buyers are left with increasingly limited options when it comes to houses. By giving your child financial assistance, you’re broadening their scope to better homes, and better mortgage deals.
- Lower repayments: a larger deposit also means smaller monthly repayments to make over time, and potentially a lower rate of interest.
Cons of using bank of mum and dad:
- Potential inheritance tax: while there shouldn’t be any immediate tax charge for you or your child when you gift money, it’s possible under some circumstances that inheritance tax could apply in future.
- Second property tax: if you go for a joint mortgage to purchase your child’s home, and you already have a main home of your own, this technically means you’re purchasing an additional home. This means you’ll need to pay an extra stamp duty charge.
- Risk to your personal assets: on the other hand, if you choose a guarantor mortgage, you’re putting down your own money or property at risk, and you could lose out if your child misses repayments.
- Impact on your savings: the more you give to your child, the less savings you’ll have for your own future. This is important to give proper thought to, especially when it comes to planning your retirement and covering the potential cost of later-life care.
For young people borrowing money from family to buy a house, or parents looking to support them, it’s essential to seek proper financial advice before making any decisions. Contact us to speak with our expert advisors.