Bank of Mum and Dad

By: Kelly Lush, Company Manager and Mortgage Adviser at Open Vision Finance. I am an experienced Mortgage Adviser at Open Vision Finance, specialising in Mortgage Advice Bristol, Taunton and the South West region. 

Having recently read an article with Mortgage Solutions around the ‘Bank of Mum & Dad’ being the most searched residential term in August 2018 by brokers, I took to do some research into this myself and came across a report* published by Legal and General (L&G) into just how big a part the Bank of Mum & Dad contributes towards UK house purchases.

The read was extremely interesting, I’d always known that gifted deposit by parents, other family members and even friends were extremely common – but somehow putting an actual number and percentage on these facts really resonated with me. I think in positions where possible homeowners are fortunate enough to receive gifts from family members, it is a such a brilliant thing! With the increase in house prices (albeit at a slower rate than we have seen historically) and what many would view as a sluggish growth on household income, times are not only tight for those looking to buy, but also for the people who may be offering such a gift, as money they have to spare may start to reduce. The L&G report indicated that from their statistics they saw signs of strain on the Bank of Mum & Dad, even suggesting that this may not be sustainable in the future.

A brief overview of some of the facts that struck a chord with me, taken from the Legal and General Bank of Mum & Dad report were:

• In 2018, 27% of buyers are predicted to receive a gifted deposit (up from 25% in 2017)
• In numbers this equates to 316,600 people assisted in 2018 (up from 298,300 in 2017)
• Over 1 in 4 house purchase transactions in the UK are dependent on the Bank of Mum & Dad
• 1 in 5 (20%) purchasers are assisted by their parents
• 71% of Bank of Mum & Dad “lenders” say they used their own cash savings towards their loved one’s purchase
• 1 in 5 (20%) of Bank of Mum & Dad “lenders” confirmed they had to downsize their homes in order to provide such gifts
• Almost 1 in 5 (17%) of Bank of Mum & Dad “lenders” felt they had to accept a lower standard of living, cutting back on luxuries etc. in order to be able to gift funds

I truly believe that ‘Bank of Mum & Dad’ will always have a vital role to play in helping their loved ones onto the property ladder. However, with the above in mind, I wanted to ensure that all potential purchasers are aware of the help available to them not only from their parents, family members and friends but also some government backed schemes.

Help to Buy: Equity Loan 

This is a scheme eligible to both first time buyers and home movers enabling the purchase of a new-build property with only a 5% deposit, up to a maximum purchase price of £600,000. Purchasers must not own another property at the time they buy the new home with this scheme. With the smaller deposit required of 5% – this could enable the Bank of Mum & Dad “lenders” the need to contribute a smaller amount, with the 20% equity loan plugging the difference and still allowing buyers to purchase with an overall deposit of 25%.

The Government lends up to 20% of the cost of the new build property in the form of an equity loan, which is interest free for the first five years.

(Example 1 – purchasing a property for £200,000, the 5% deposit would equate to £10,000, using the Government 20% loan of £40,000, leaves a mortgage of £150,000).

This allows a purchase with a 25% deposit! This also means that the monthly mortgage payments will be reduced over the first five years and in many cases gives purchasers access to cheaper mortgage rates, as a mortgage of 75% of the property’s value will be required. A monthly management fee of £1 per month is charged for the use of the help to buy equity loan until it has been repaid fully.

When the property is to be sold – if the equity loan has not been repaid previously – the 20% equity loan would be repayable at this point, based on the value that the property being sold.

(Example 2 – selling the property for £210,000, the equity loan to be repaid at this point would remain at a 20% share equating to £42,000).

If the property is kept and the equity loan is not repaid within the ‘interest free’ initial five-year period, from year six interest is charged on the loan at a rate of 1.75%. The following years will be increased at the retail prices index, plus one percent.

(Example 3 – if the RPI in year seven is 3%, the interest rate would rise by 4% (3% plus 1%) and the rate therefore payable in year seven would be 1.82%).

If you are part of the armed forces or live in London, there are specific Help to Buy loan schemes available to you and the figures detailed above will differ. Please get in touch with us for more information relating to any of these schemes.

Help to Buy: ISA

An alternative idea, if you are not looking necessarily to purchase brand new… Come up with a savings plan, start saving as soon as possible and use a Help to Buy ISA! A little pre-planning, the knowledge that the deposit won’t appear overnight and will take some years to save, will assist with the Bank of Mum & Dad “lenders” possibly needing to contribute a smaller amount.

This scheme is for first time buyers only, who are saving towards the purchase of their first home. When saving into a Help to Buy ISA the Government will provide a bonus of 25% on the interest and contributions once purchasers are in a position to buy. The bonus funds will be sent directly to the Solicitors at the time of purchase, these funds can be used towards the deposit funds or the purchase related costs.

For every £200 saved, a bonus amount of £50 will be received. Up to a maximum government bonus of £3,000. The Help to Buy ISA’s are available to the individual first time buyer, which means that if purchasing jointly, for example with a partner, a government bonus of up to £6,000 could be received for the purchase of a first home!

Many of the High Street Banks and Building Societies are now offering Help to Buy ISA’s with very competitive interest rates attached to their accounts. If you are a first time buyer and you are currently on the road of saving for your first purchase, the Help to Buy ISA is great, as you will receive additional funds in the form of a bonus just for saving into these accounts!

#OVFTip – search and follow some hashtags on Instagram! There are many first time buyer savings hashtags which are trending and offer some very cute ideas into how savings can be made; from purchasing reduced items, account tidying or top voucher codes! Every little helps!

If you are a Bank of Mum & Dad “lender” and would like to know your options further into different ways funds can be raised to help a loved one, for a non-obligatory advice appointment please feel free to contact us, as we’d love to discuss these further with you.

Contact Details – Mortgage Advice Bristol, Taunton and the South West Region

If you have found this article interesting or would like to arrange an appointment with one of our experienced mortgage consultants (Mortgage Advice Bristol, Taunton and the South West Region), please get in touch with us on 01823 444022 or by email to advice@openvisionfinance.com.

*Source referenced: https://www.legalandgeneral.com/retirement/_resources/documents/more-money-in-retirement/reports/bank-of-mum-and-dad-report-2018.pdf