Caution over Bank of Mum and Dad loans for property purchase

Parents looking to help children get a first step onto Cumbria’s property ladder are being urged to investigate the safest ways to join the so-called Bank of Mum and Dad.

Average house prices in the county have quadrupled1 in the last 25 years while wages have remained stubbornly behind the curve.

Meanwhile, a post lockdown surge in interest in the county has seen up to 55% of transactions completed by buyers from outside of Cumbria.

It means parents and grandparents across the area are often now looking to provide a cash deposit to help younger generations purchase their first home.

But this act of generosity, warned Carlisle-based financial adviser Rachael Bell, Principal at Rachael Bell Wealth Management, could actually leave them financially vulnerable for the future.

She is now urging people to investigate the safer alternatives before handing over a lump sum.

“We’re finding that some parents are delaying their retirement or cashing in pension pots and using the tax-free cash from their pension to help their children, when they shouldn’t be,” she said.

“Parents who do this may risk impacting their own retirement plans.”

“Giving a large chunk of money often isn’t the best way to help, especially since there are various other options that can be explored.”

The so-called Bank of Mum and Dad has become the UK’s 11th biggest lender2 as young people battle to save deposits of up to 20 per cent while struggling to cover the ongoing costs of renting.

The issue is particularly acute in Cumbria, with figures showing a steady rise in the media house price compared to the median annual household, with the figure standing at 5.4 by 20173.

Rural towns and villages are also expected to become more attractive to buyers from out of the region post Covid-19 lockdown, as remote working becomes more popular and people look to relocate out of cities and urban areas.

Adrian Tod, director of Hayward Tod estate agency, said there had been an upturn in the market since the easing of lockdown.

The estate agent of 30 years, whose business covers a huge swathe of north and west Cumbria along with parts of southern Scotland, added: "The market has been extremely strong and the biggest factor has been out-of-area enquiries - and indeed buyers - who have accounted for about 55 per cent of sales in June.

"That compares to around 25 per cent in a normal month, so there has been a definite shift as people look to our region.

"There is always the danger that activity of this nature can contribute to young people having trouble when trying to get their foot on the property ladder, but what is interesting to note is that many of these buyers are not looking for second homes, but to relocate. This creates a different dynamic and does not have the same upwards effect on prices.

"That said, we have noticed over the years a significant increase in parents and grandparents contributing to the purchase of a house and we specifically hear it either from the horse's mouth or from the buyer, because we need to understand how the property purchase will be funded.

"A lot of the time the parents or grandparents are helping family members out and to my mind, that's an excellent thing. I'd certainly do that with my children because the sooner you put money into property, the better. While it is not necessarily the quickest way to make a fortune, if you are in it for the medium to long term, then property won't let you down."

Alternatives to a cash gift include intergenerational mortgages which take into account parents’ or grandparents’ finances and don’t require them to hand over large amounts of cash.

Parents can jointly apply for a mortgage with their younger relative, so their income is included in the lender’s assessment and will increase the child’s borrowing potential. In this case, it’s vital to consider the legal and tax implications.

In a joint borrower sole proprietor arrangement, the older relatives will not be named on the property ownership deeds, meaning they will not be liable for the Stamp Duty surcharge on the purchase, nor Capital Gains Tax when the property is sold.

A parent or grandparent could also use a portion of their savings to reduce - or offset - the homebuyer’s repayments and secure the mortgage.

Rachael said parents should seek expert financial and legal advice when considering the best way to help their children.

She added: “Older generations looking to give their children or grandchildren a boost onto the property ladder don’t need to drain their retirement pot.

“If you’re a parent or grandparent looking to help a younger relative buy a property, then it’s crucial that you take legal and financial advice before you enter into any type of contract.

Rachael Bell Wealth Management is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website