Why the ‘Bank of Mum and Dad’ is one of UK’s top lenders
If the ‘Bank of Mum and Dad’ was an accredited mortgage provider, it would be one of the biggest lenders in the UK, new research has found.
A study by Legal & General has revealed that parents are set to provide the finance for 25 per cent of all mortgage transactions this year. In total, UK mums and dads will let their children borrow as much as £5 billion to provide the deposits for more than 300,000 mortgages.
According to the research, the average contribution of the Bank of Mum and Dad is equivalent to 7 per cent of the purchase price of the property. When added to the buyer’s own savings, this should be enough to help them buy their first home. However, not every young person in the UK gets this financial support.
Help to Buy
Last year, a report by KPMG found that the average first-time buyer in the UK needs to earn close to £41,000 in order to take out a mortgage with a 10 per cent deposit. That’s a sizable sum to earn if you’re buying alone and basing the mortgage on your income.
If your parents or other family members are unable to give you a financial helping hand to get on that property ladder, what can you do? Well, there is help available.
Last year the government announced the launch of its Help to Buy ISA*. Available exclusively for newcomers to the housing market, the scheme rewards savers by boosting their savings. So, if you put away £200 a month, you’ll get an additional 25 per cent – equivalent to £50 in this example – from the government.
There are Help to Buy ISAs available at a number of banks and building societies and you can get one per buyer, rather than one per household. This means that if you are buying a house with a partner or friend, you can each open a Help to Buy ISA and benefit from a government bonus.
Help for the Bank of Mum and Dad
But what if you’re a parent and you want to help your child buy their first home – is there anything of which you need to be aware? Well, one thing you may not know about is the new stamp duty thresholds for people buying a second property.
If you buy a new property while you still own one, you will now be charged a higher stamp duty rate. For example, if you pay £120,000 for a house, you’ll have to pay 5 per cent as stamp duty if you already own another property – compared to 0 per cent if it is your only home (see a breakdown of the new thresholds here).
This means that if you own a home and you want to buy one for your child, you will need to include this higher rate of stamp duty in your budget. If you want to avoid this, you could consider acting as a guarantor on your child’s mortgage instead. Alternatively, you could provide the money for their new home as a cash gift. You can find out more about these options here.
*It was reported in August 2016 that the government bonus on Help to Buy ISAs cannot be included in the initial deposit on a home, but is paid once the sale has completed. Find out more here.
Disclaimer: All information and links are correct at the time of publishing.