Beware the dangers of being the bank of mum and dad
BY Harvey Jones
1st Jan 2015 Managing your Money
The "Bank of Mum and Dad" has turned into one of the UK’s biggest mortgage lenders but as we saw in the financial crisis, banking can be a risky business. Parents and grandparents who are helping younger family members get on the property ladder need to be careful or they could end up putting their own home at risk.
If simply giving money away you need to be absolutely certain you will not need the cash yourself in future. Alternatively, if putting up collateral for a child's mortgage, you must avoid putting your own home at risk in case the child cannot keep up with their loan repayments.
Helping youngsters is an admirable goal, but in contrast to the big banks, the government will not bail you out if something goes wrong, so be careful.
Mind the gap
The "Bank of Mum and Dad" is now a major player in the UK economy, with a stake in one in four UK property transactions, according to research from Legal & General. This makes it the ninth largest mortgage lender in the UK.
Parents and grandparents are also helping with university fees and even everyday living expenses, plugging what has become known as the intergenerational gap.
The lucky ones have enough spare cash to simply give some of it away, but if you aren't in that position there are other ways of helping.
The homefront
Bath Building Society, Family Building Society and Aldermore Bank allow parents to use the spare equity in their home as collateral for their child’s mortgage.
Be warned, if your child falls into arrears or defaults, you could be on the line for any loss the bank incurs after it repossesses and sells the property to clear the debt.
If you cannot meet the shortfall, your own home could potentially be at risk.
Title chase
Barclays, Metro Bank, Hinckley & Rugby and Bank of Ireland allow parents and children to take out a mortgage in joint names, helping the youngster borrow more.
Crucially, the property title is in the child’s name only. That way the parent does not have to pay the 3 per cent stamp duty surcharge on second home purchases. They also avoid having to pay capital gains tax when the property is sold.
Again, you could be responsible for any mortgage arrears and these deals could limit your ability to borrow money under you own steam.
Spring ahead
The Barclays Family Springboard mortgage lets young buyers take out a mortgage of up to 100 per cent of their property’s value, provided the parents deposit cash equivalent to 10 per cent in a special savings account.
The cash acts as security for the loan but also earns a competitive rate of interest.
Parents can access their money after three years but Barclays reserves the right to hold onto it if the child falls behind with their mortgage repayments.
It may be worth taking specialist mortgage advance to find the right option for you and your children.
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