The Bank of Mum and Dad: top tips when lending money to your children
If your children or grandchildren are struggling to get onto the property ladder you may have considered offering them money to help. If you have, you are not alone. According to a recent report by Legal and General, family and friends in the UK gave their loved ones £5 billion to fund house purchases in 2016. This figure is expected to rise to £6.5 billion in 2017, making the so-called ‘Bank of Mum and Dad’ one of the top ten mortgage lenders in Great Britain and Northern Ireland.
So, what do you need to think about if you would like to help? Louis Mathers, residential property lawyer with Parnalls in Launceston offers his top tips.
- Can you afford it?
It may sound like an obvious question, but you need to think about whether you can afford to help. You may have lots of equity in the family home, or a reasonable amount tucked away in savings, but will you need that money in the future? What if you lost your job or needed to go into a care home? Would lending the money affect your current or future standard of living?
You need to assess your financial situation and your future needs, and use that to determine what, if anything, you can afford to offer. If you are thinking about using an equity release plan then specialist legal advice should be taken before you commit to anything.
- Should I gift or loan the money?
According to the Legal and General report, 57% of family and friends who gave money to their loved ones did so by giving it to them outright as a gift. 18% offered support in the form of an interest free loan, and 5% gave help via a loan on which interest was charged.
The most suitable option for you will depend on your circumstances. If you do decide to make a loan and charge interest, there may be tax implications.
If you have access to money that you are not going to be dependent on in later life, and the value of your estate when you die is likely to exceed the rate at which inheritance tax is payable (currently £325,000), then a gift might be more appropriate as it could help to cut the inheritance tax bill payable on your estate.
A solicitor can help you work out which option is best for you and prepare any necessary paperwork to record what has been agreed. They can also update your will if necessary and prepare a letter of wishes to explain why, as a result of any gifts made during your lifetime, your children may receive more or less than they were expecting on your death.
- What about my other children or grandchildren?
How many children or grandchildren have you got? Will anyone else need support? Will there be any family resentment if you offer financial support to some but not others?
The dynamics of family life can be challenging and you need to think about this when deciding what to do. Would it be better to treat everyone equally and give them all a small sum to help fund a deposit, or would your family prefer you to offer extra support to someone who is struggling more than everyone else?
- What if I am asked to act as guarantor?
If child or grandchild asks you to act as guarantor, what they are effectively asking you to do is to guarantee to their mortgage lender that they will pay their mortgage and otherwise abide by its terms. This is a major commitment for which you need specialist advice.
You may be confident that your child or grandchild can afford the mortgage and will keep up with payments, but what if something happens which affects their ability to pay? You could be left on the hook for any payments they miss and for any other penalties or sanctions the mortgage company can impose.
- How do I say no?
It may be, having thought about things, you decide you are not able to help. Breaking this news can be difficult but it is better to be honest and explain your reasons rather than go ahead and do something you cannot afford or you are uncomfortable with.
It may be that you have to say no to an outright gift, but that a loan with a structured repayment plan might be an option. It might be that there is some other way you could help, as mortgage companies are constantly finding new ways to accommodate family support.
If you are thinking about joining the Bank of Mum and Dad and need advice to help protect your position, please contact Louis Mathers on 01566 772375 or email firstname.lastname@example.org
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.
KATHERINE FLASHMAN KITSON CELEBRATING 25 YEARS AS A DIRECTOR OF PARNALLS
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