First-time buyers are turning to the Bank of Mum and Dad for help on to the ladder. But what should parents bear in mind before digging deep? We speak to families who have been through this.
In 2017, the Bank of Mum and Dad is expected to lend their children £6.5 billion to help them take that difficult first step on to the property ladder. This makes parents the ninth largest lender in the UK, according to figures from Legal & General.
It’s hardly surprising first-time buyers are crying out for help. Figures from the Office for National Statistics (ONS) show that during 2016, first-time buyers were typically paying around £198,000 to buy an entry level home. In London, the challenge was even greater with the average starter home costing over £423,000.
Using the example of Waltham Forest – a more affordable part of the capital where starter homes average £335,000, the ONS says a first-time buyer would need to demonstrate an income of around £46,500 and put down a deposit close to £59,000.
These challenges are undisputed and with many parents believing they’ve had it easier than their kids, they want to help. Nigel Wilson, chief executive at Legal & General, says: “Younger people today don’t have the same opportunities that the baby boomers had – including affordable housing, defined benefit pensions and free university education.
Parents want their kids to get on in life and the Bank of Mum and Dad is a testament to their generosity.”
The most common way for parents to help their children is to stump up for the deposit, and Legal & General claims some 42% of prospective homeowners are now buying with the help of family.
Every pound matters for first-time buyers, and the more they can put down the better.
David Hollingworth, associate director at London & Country Mortgages, says: “The first issue for first-time buyers is getting together a big enough deposit to drive down the loan to value and open up better rates. If a borrower has a 9% deposit, for example, it will always be worth trying to get it up to 10%.”
He gives the example of deals available at the time of writing: For a 95% loan, Nottingham Building Society offered a two-year fix at 2.99%, but if you could push this to 90% you could be getting 1.9% from Leek United. “That extra 5% on the deposit will typically reduce your interest rate by around 1%,” Mr Hollingworth says.
However, while the temptation to help struggling offspring can be immense, experts are warning parents not to give away money that could jeopardise their retirement.
This is particularly pertinent following the introduction of new rules in April 2015 that give savers full access to their pension from age 55.
“This is very much a head versus heart debate,” says Alistair McQueen, pensions policy manager at Aviva. “Your heart wants to help but your head needs to kick in and think. The pensions freedoms have made pensions more front of mind, but the short-term pleasure of helping your child could quickly be replaced by long-term pain if money ends up tight in later life.”
Richard Parkin, head of pensions policy at Fidelity, adds that when withdrawing money from their pension, parents don’t just need to think of the initial capital loss, they need to consider loss of growth and the impact this will have on their retirement finances.
Take the example of a pension worth £100,000 at age 55. By age 65, figures from Fidelity show that it could be worth just under £162,889. If used to purchase an annuity, it could pay out an income of just over £6,108 a year and provide tax-free cash worth £40,722 (based on annuity rate of 5%).
“If I gave my kids £10,000 at age 55, I would still get the same income at age 65, but my tax-free cash would drop by over £16,000 – effectively that’s the £10,000 I gave away plus growth. If I gave away £20,000, again my income would be unchanged but I would only have £8,144 of tax-free cash, so I’m down over £32,000,” explains Mr Parkin.
There are short-term implications of raiding your pension to consider too. “You may end up paying tax on your withdrawal,” warns Mr Parkin, as only the first 25% of any withdrawal is paid tax-free. “The money will be added to your earned income for the year and could feasibly bump you into the 40% tax rate.”
Then there are pension allowances to think about. “Although it’s in limbo at the moment, your withdrawal could trigger the money purchase annual allowance (MPAA), which could restrict how much more you can save in a pension going forward,” explains Mr Parkin.
The MPAA is the amount you can save in a pension each year once you have accessed it – this was reduced from £10,000 to £4,000 in April this year, but didn’t make it through the Finance Bill ahead of the general election, so it is not clear yet at what point the cut will be formalised.
Either way, it’s substantially less than the £40,000 savers are able to pay in before they access their pot and it’s an important point to consider if you’re expecting an inheritance or plan to pump bonuses into your pension in the final years of your working life.
Mr McQueen adds: “A pension is a very rich asset for many parents, but it is one with a very clear purpose and that is to fund your retirement.”
Even if you aren’t raiding a pension, it’s still important to think about what impact handing that money over will have on your long-term financial security. This is particularly important if you have more than one child and feel the need to support them all equally.
How to help your child without providing a deposit
A number of mortgage lenders will now allow first-time buyers to harness their parents’ financial security without them physically handing money over. These deals enable lenders to issue lower deposit mortgages with more affordable monthly repayments.
The Barclays Springboard mortgage was the winner in the ‘Best lender for first-time buyers with support’ category of this year’s Moneywise Mortgage Awards. This deal asks parents to invest 10% of the property price in a linked savings account.
Alternatively, the Family Mortgage from the Family Building Society offers parents (or other family members) a variety of ways to help the younger generation. One option allows parents to pay money into a linked account – like the Barclays option – or they can use the equity that has built up in their own home to act as security. The third way is to use an offset mortgage – this reduces the first-time buyer’s repayments by only calculating interest on the loan, less the amount held by the parents in the offset account. Families can use any combination of these three options together.
Yet while these deals may not mean parents say goodbye to their savings altogether, if they involve putting money into a linked account they will be tied up for a period of time. “It’s important that family members understand what their access to their money will be,” warns Mr Hollingworth.
With the Barclays product, parents’ money will be held for three years – whereas the Family Building Society reviews the parents’ stake at three or five yearly intervals (depending on the term of the fixed rate). The maximum term money will be held for is 10 years, but parents may get some or all of it back earlier if the loan is being managed well, the value of the property has gone up and the buyer’s affordability has improved.
Likewise, the child needs to understand that if they want to remortgage further down the line, their choices may be more limited once that financial support has been withdrawn – particularly if house prices don’t go up and they still require a high loan-to-value loan.
Another option that might be worth considering is a guarantor mortgage. These loans don’t require you to part with any cash up front, but if your child doesn’t meet the repayments, you’ll be called on to pay them. Mr Hollingworth explains: “The child is on the mortgage and owns the property, but the lender has the comfort of knowing that the parental income is there.”
These deals aren’t as common as they were, but they are still available from lenders including Leeds Building Society, National Counties Building Society and Virgin Money. Other lenders prefer to tap this market with ‘joint mortgage, sole title’ arrangements where parents are named on the mortgage and are liable, alongside the child for repayments. However, they don’t have any ownership rights on the property. This means it can’t be regarded as an investment opportunity for the parent, but it does avoid the stamp duty and capital gains tax issues which could potentially arise if the parents were listed as joint owners.
It’s then down to the parents and child to work out who is responsible for the mortgage repayments.
“Bank of Ireland has recently introduced this sort of deal, and they are also available from Hinckley and Rugby Building Society and Metro Bank,” says Mr Hollingworth.
For many parents, a deal that doesn’t force them to stump up huge sums will be a more appealing option. “Harnessing the value of an asset without selling it is certainly worth exploring before you, say, dip into a pension,” says Mr Parkin.
Yet it is still not an option to take lightly: your financial security could become dependent on your child’s ability to manage their mortgage. It would also be considered if you needed to borrow further down the line.
Even if you trust your child to make repayments, many of these offers may still not be enough to help them buy – particularly in areas where house prices are high. For many first-time buyers, it will only be the gifted deposit that will give them the leg-up they need.
In these cases, parents have some serious thinking to do. “You need to be objective,” says Mr Parkin “and make sure you aren’t being pressured.”
As Mr McQueen says: “Your children have time on their side to save up their money, which you as a parent do not.”
“We used an inheritance to help our kids”
Stephanie Wolfe and her husband, Simon, from Faversham in Kent have committed to helping all four of their children buy property.
They recently gave Alex, 24, and Florence, 27, £50,000 each, which they pooled together to buy a maisonette in Penge. “My father passed some of his money to us and instead of going on nice holidays we’ve kept it on hold to help our children out with house deposits,” says Stephanie, who runs a garden maintenance business. “Both of them had been renting in London, and I was appalled at how ghastly the properties were and it was ridiculous what they were costing. It was so hard for them to save and we wanted to get them out of that situation.” Stephanie’s elderly father has not suffered from passing his savings over either. “He has a very good pension. He said he didn’t need the money and wanted it to go to family,” she says.
“I used my savings to reduce my niece’s mortgage payments”
Dave Stephenson, managing director of Manor Mortgages in Bristol, used his insider’s knowledge of the mortgage market to help his niece, Charlotte, and her now husband Sam (pictured above) to buy their first home, a two-bedroom house, also in Bristol.
He says: “My niece was trying to organise everything herself on the high street, but she only had a 5% deposit and repayments were working out a lot more than she expected.”
Charlotte came to consult her uncle and he told her about mortgages offered by the Family Building Society and he volunteered to help by investing £33,000 into an offset account linked to Charlotte and Sam’s mortgage. “I had the money sitting in savings not earning anything, but by doing this I’ve been able to reduce Charlotte’s mortgage payments by £200 a month over a three-year period.”
Dave is happy with the arrangement. “They aren’t getting my money, just the use of it, but the mortgage savings have really helped them and enabled them to get work done on the property,” he says. “They’ve since got married and are now getting everything ready for their first baby.”
“I’d rather he had the cash now when he needs it”
Michael Acton, a gas safety consultant from Loughborough, and his wife Frances have recently remortgaged their home and raided their savings to help their son Oscar, 23, buy his first home. “He graduated last year and recently started a new job in Royston.”
Michael (pictured left with Oscar) and Frances felt that renting was money down the drain, so they dug deep to help him buy. “Nationwide was willing to lend against his job offer, but it wasn’t enough. We borrowed £89,000, then added £70,000 and he borrowed £128,000.” In order to find the cash lump sum, Michael dipped into his pension.
“I had just turned 55 and could take advantage of the new pension freedoms. I transferred my defined benefit pension into a self-invested personal pension (Sipp) and took out the tax-free cash.”
Michael and Frances had previously paid off the mortgage on their Victorian detached home, but were keen to help out their son. “We had already helped our daughter and I would rather they have the money now when they need it than when I die. I want them to have security – house prices are massively more expensive than when I first bought and I got help from my parents too.”
Make the most of Isas
If you are giving your children money towards a deposit, ensure they are making the most of government tax breaks. The Lifetime Isa, which launched in April this year, enables 18- to 39-year-olds to save up to £4,000 a year towards a home or their retirement tax-free and get a 25% savings boost from the government (maximum £32,000). However, they need to hold it for one year before they can buy their property. If they plan to buy within a year, it’s worth considering a Help to Buy Isa. These can be opened with £1,200 and £200 can be paid in each month thereafter tax free. When your child is ready to buy, they can apply to the government for a 25% boost (maximum £3,000).