Buying a first property is a significant step in life’s journey. In recent years, it’s a step that’s become higher and more insurmountable for many and it shows no sign in the short term of becoming any more manageable. First-time buyers are saving longer for their deposits, purchasing their properties later in life, and gathering help from wherever they can along the way.
Taking the Leap Later
A recent survey found that the average of age of the first-time house-buyer has increased from 23 years old in the 1960s to 30 years old today. The first step onto the property ladder is no longer necessarily assumed to be a leap people take when they’re young; it’s slowly turning into something that they hope to be able to achieve before they reach middle age (particularly in London and the South East of England).
The same research found that homebuyers in the 1960s spent just over two years saving towards an average deposit of £595 – the equivalent of around £12,738 today and approximately 20% of the average household income at the time (£2,854). However, first-time buyers since 2011 needed to save for more than five years for an average deposit of £20,622 – which amounts to more than 57% of the average annual household income today (£35,634). Perhaps unsurprisingly, nearly half (48%) of today’s first-time buyers received help of an average of £10,200 towards their deposits from their parents.
A Leg Up the Ladder
We’ve all become familiar with the concept of the Bank of Mum and Dad, the reaction of the generation above to the increasing difficulty that today’s buyers have in getting on the property ladder. It has become a common feature of the house-buying process for those lucky enough to have parents who can help.
When Mum and Dad are keen to offer some financial assistance to their children with their first property purchase, one way that some choose is through a loan from a trust fund. This can be a sensible way to approach the issue, but comes with pros and cons to weigh up.
There are a couple of clear advantages to taking the trust route. When funds are held in a trust they exist outside the parents’ estate, which means they are not liable to inheritance tax. Secondly, if their child is part of a couple and the relationship breaks down, the trust is effectively able to call in the loan. This means the money is protected and remains in the family.
Conversely, loaning from a trust can present some problems when the first-time buyer comes to apply for a mortgage. Let’s say, for example, that a first-time-buyer has a total deposit of £150k. This is made up of £50k of their own savings plus an additional £100k which is being loaned to them from the trust. Their ideal property is on the market for £300k so they will still need to arrange a mortgage to cover the additional funds they need to make the purchase. However, when they approach their high street bank or lender for this, their mortgage application is declined because the lender won’t approve an application when some of the deposit money is being loaned to the buyer.
The bank’s concern is that, were the buyer to encounter difficulties with their repayments and the property fall into negative equity, then the trustees would call in the loan and have a claim on the money before the bank. This is very unlikely to be the case in reality, but it doesn’t stop many banks from declining an application on these grounds.
Trusting the Right Advice
With the right advice, however, and a knowledge of the options available in the market, it can still be possible to lend money from a trust towards a house deposit. It’s important that any buyers and their parents bear this in mind when considering this route. We can advise our clients on which banks to approach in this situation as not all apply the same criteria. Some take a more enlightened view on mortgage applications where the deposit is structured in this way rather than applying a knee-jerk, blanket ban on them. This helps protect clients against wasted time, declined applications and a great deal of avoidable anxiety.
A key benefit of the way we operate at Progeny is that we can give our clients the guidance and expertise to deal with not just this particular situation but at all other stages in the house-buying process too. Our unique framework of coordinated advice and insight provides support with integrated financial planning, legal services and asset management. So, if parents are looking to assist their offspring with the purchase of their first home we can help them decide how much they can contribute, the best way to structure the loan (if that is their chosen strategy), and guidance on the appropriate lenders, while also dealing with the legal administration of the property transaction itself.
Keeping it all under one roof makes it simpler, more economical and provides the security and assurance necessary for everyone involved – the Bank of Mum and Dad and its customers alike.
On a similar topic, Suzie Farnell and Neil Moles of Progeny spoke recently to The Times about the pros and cons of buying a house with a friend or partner.
If you would like financial and legal advice over the purchase of a property, please get in touch.
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The content of this article is for information only and is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. Progeny Private Law Ltd accepts no responsibility for the content of any third-party website to which this article refers.
