Buying your first property is a significant step in life’s journey. First-time buyers are taking longer to save for their deposits, purchasing their properties later in life and gathering help from wherever they can along the way.
One vehicle for support is through Trusts, commonly used to mitigate Inheritance Tax (IHT) and secure legacies of wealth by keeping it away from the estate. A Trust also means parents and grandparents can maintain some control over the funds until the Beneficiary reaches a certain age and they are also able to call in the loan should any plans change, keeping the wealth protected.
There are however both pros and cons with this process, which we will detail further in this article.
Taking the leap later
Getting onto the property ladder is no longer necessarily assumed to be a step people can take in their twenties and early thirties.
Latest figures show the average age of a first-time buyer is 32 years old, which may seem considerably later than the Boomer generation. 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).
According to Generation Rent, the average time it takes to save for a house is now around ten years. It is no wonder the next generation are struggling to get a foot on the ladder.
Loaning from a Trust
We’re all familiar with the term “the Bank of Mum and Dad” – this is the reaction of parents and guardians to the increasing difficulty that today’s first-time buyers have in getting on the property ladder. It has become common in the house-buying process for parents and grandparents to want to support in funding the deposit.
If family members want to contribute towards a first-time property purchase, one vehicle to do so 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 of the parents’ estate, which means they’re 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, they may find 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 falls 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, but it doesn’t stop many banks from declining an application on these grounds.
Stephanie Thayer, Mortgage Advisor comments:
“Whilst many lenders will decline a mortgage application when the deposit has been loaned to the applicant, there are a handful of mortgagees who will allow this and some even allow a formal second charge to be arranged to legally protect the money that has been loaned. Generally, the terms of the repayment will need to be based upon sale of the property and of course, the bank will always have the first charge on the property. It is important to take advice before arranging a mortgage with complexities like deposit loaned from a trust.”
Trust in professional advice
However, with the right advice 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 or grandparents 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 connected financial thinking provides support with integrated financial planning, legal services and asset management.
So, if parents are looking to assist their children 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.
If you would like financial and legal advice over the purchase of a property, please get in touch.
Please note
The information contained within this document is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK.
This article is distributed for educational purposes only and should not be considered financial advice.
If you are unsure about the suitability or otherwise of any product or service, we recommend that you seek professional advice.
The opinions stated in this document are those of the author and do not necessarily represent the view of Progeny and should not be relied upon to make a financial decision.
Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
