With rising mortgage rates, parents and grandparents are faced with difficult decisions when asked to give mortgage assistance by their children or grandchildren.
Parents and grandparents, often referred to as ‘the Bank of Mum and Dad’ are estimated to have given £8.8 billion of financial support to residential property to 170,000 first-time buyers in 2022. In fact, they have been a consistent supplier of gifts and loans to almost half of first-time buyers in the last ten years.*
Rising interest rates over the past 18 months could now see the Bank of Mum and Dad facing some difficult questions.
Increased mortgage costs
It is likely that first-time buyers who have been financed by parents and grandparents will have borrowed from mainstream lenders. This means they are due to be facing increased mortgage costs when their two-year or five-year fixed rate mortgage deals are up.
The Financial Conduct Authority has enabled mortgage providers to offer “mortgage breathing space” to their borrowers. Some lenders will now offer a switch to interest-only payments for 6 months or give options to extend mortgage terms to reduce the cost of monthly payments, with the option to switch back within 6 months. Both can now be offered without an affordability check.**
The measures are designed to give some relief for people dealing with higher interest rates. It’s important for borrowers to be aware that making changes, even temporary ones, could likely result in higher payments in the future. It could also mean paying back more overall.
Should I give mortgage assistance to my family?
So, what should you do as a parent or grandparent when you are asked for mortgage assistance by your children/grandchildren? The answer will depend upon your personal circumstances.
There are a few questions to ask yourself before giving your answer:
- What other actions has your child or grandchild taken to reduce their mortgage outlay?
- How long is your financial support likely to be required?
- How much capital, if any, you are willing to gift or lend?
- Will you need to realise an investment to provide liquid funds? What is the impact of this?
A financial planner can best advise you on your affordability should you choose to provide mortgage assistance to your child or grandchild. There could also be inheritance tax implications to consider, so advice is essential. Mainstream banks undertake due diligence before lending, so should the Bank of Mum and Dad.
If you would like to discuss your plans to give mortgage assistance to your descendants, or how you can incorporate planning for this for the future in your financial plan, please do get in touch.
*Savills, Bank of Mum & Dad paid out almost £9 billion in 2022, March 2023
** FCA enable firms to provide mortgage breathing space, 2023
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The information contained within this document is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK.
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