Wellbeing Guide from Police Mutual Let Talk Money – Bank of Mum and Dad
Parents have always supported their children emotionally and financially whilst growing up. In more recent years, with many young people struggling to save enough money for a house deposit, many parents, grandparents, or family members are helping them get on the property ladder financially with their deposit. This is known as the ‘Bank of Mum and Dad’ or ‘Bank of Family’. This help could be through a gift, a loan, or by becoming a guarantor for the mortgage. Having help to submit a larger deposit can significantly improve the mortgage approval chances
and potentially secure a more favourable interest rate.
The Bank of Mum and Dad is even considered one of the UK’s biggest lenders.
It’s essential that parents and their children know the rules of how the Bank of Mum and Dad will work. Not only for their own financial protection, but also for peace of mind. It therefore makes sense to talk through the agreement before any money has been provided, regardless of how uncomfortable it may be. There are several things you may want to consider:
Deciding whether the money will be a loan or a gift – handing money over without making the intentions clear has the potential to cause long-term harm to the parent/child relationship. It’s important for both sides to understand the terms. Is this a loan to be repaid back over a specified term or a gift that does not have to be repaid, as it’s an advance on the child’s inheritance? Even if both sides understand the money needs to be repaid, if timescales are not laid down, there may be frustrations if the parents feel their child is taking too long to pay them back.
If the money is a gift, and the parents are not expecting to get the money back, then it’s important to speak to a solicitor for advice. A formal “Deed of Gift” could be set up, as there may be implications for Inheritance Tax.
If the payment is a loan, the parents may want to consider putting their intentions and expectations in writing. This may seem extremely formal for a transaction between a parent and a child but there are reasons why this is a good idea:
• This document can stipulate how much needs to be paid over what time period as well as whether any interest is due to be paid or not. This means that both parties enter the arrangement with a full understanding of what is expected of them. Legal help may be considered to draft the paperwork. Just to be aware if the money is a loan, then
the mortgage lender must factor this into their affordability calculations and so may lend less as a result.
Read more from the wellbeing guide HERE