More parents are wading into their children’s financial affairs while helping them put down a deposit – but mortgage brokers and solicitors warn they risk limiting their child’s borrowing options or even saddling them with a massive tax bill as a result.
According to YouGov data, 24pc of people buying their first property after 2020 had help from their family, up from 10pc a decade earlier.
While first-time buyers are increasingly reliant on the Bank of Mum and Dad to get their foot on the property ladder, a growing number of parents are reluctant to part with their savings without first putting a financial agreement in place.
Joe Cobb of JMW Solicitors said the law firm regularly receives enquiries from clients who are keen to ensure that gifts made to their children “won't be up for grabs in the event of a divorce or relationship breakdown”.
So far this year, JMW has seen a 29pc increase in enquiries about pre and post-nuptial agreements. If a pre-nup is not on the cards because the child is not getting married, Mr Cobb said, then instead they might choose to loan the money for a deposit.
But Mr Cobb warned this approach is “potentially problematic in terms of obtaining commercial borrowing for a home”.
Although lenders understand that parental help is part and parcel of many first-time buyers’ efforts to get on the ladder, David Hollingworth of L&C Mortgages, a broker, said, “they would typically require that the deposit is a gift, not a loan”.
Only a handful of lenders accept loan agreements, according to Chris Sykes of broker Private Finance, so people who take this route “risk limiting their options as a buyer”.
If a lender did accept the loan agreement, then they may want to factor in the monthly payment for affordability purposes – potentially reducing the amount they could borrow to meet the purchase price.
The other issue with lending the money for a deposit as opposed to gifting is it would remain in the parent’s estate, meaning it would be subject to inheritance tax.
To reduce the risk of getting caught out by IHT, some parents place the money into a trust before loaning it.
But Mr Sykes said that mortgage advisers would be reluctant to accept such a complex arrangement – and it could be an expensive mistake.
“If a family made a trust and had to then undo it, then they’ve potentially wasted thousands of pounds,” he said.