The ‘bank of mum and dad’.
A free loan from your parents to help you buy a house or some other major financial outlay?
Not so apparently.
According to some new research, in many cases there’s no such thing as a free lunch, son.
More than a quarter of parents in Britain say they would charge interest on a loan to their children, a survey by Crowdfunding property service UOWN discovered.
What’s more, the average bank of mum and dad interest rate is 4.3% – higher than rates available from high street lenders!
No wonder you never see the Bank of Mum and Dad listed in Moneyfacts or Money Saving Expert as a Best Buy!
Across Britain, the survey found Scotland most expensive, with parents charging an average 4.77% against 4.12% in England. Within England, London came in at the highest rate at 4.78% and the North East lowest at 3.66%.
Despite this, young people are using mum and dad’s support, in particular to help them get on the property ladder.
It seems they are happier borrowing from parents than from other lenders, even if rates are higher.
For many millennials, the bank of mum and dad has become the only way to buy a home of your own. The high price of property, the need to get a big deposit and difficulties in saving when also paying rent, are cited as the biggest obstacles.
According to Legal and General, children borrowed around £6.5bn from their parents last year to help them buy a property.
But such loans are not without risks, and its worth looking at some of the potential pitfalls.
For instance, if parents are named on the property’s deeds, they could be liable for the higher rate of stamp duty on the purchase of a “second home” or, if the property is later sold at a profit, they might face a capital gains tax bill.
Gifts towards a deposit can count towards a parent’s estate for inheritance tax if they die within seven years.
At the same time, parents might suddenly find themselves in financial hardship after making the loan or the children might struggle to repay it.
If property prices fall, the parent might not get their money back if a home is sold. Offspring getting into and out of relationships can also create difficulties, especially if a break-up results in a dispute over property ownership.
All in all, it’s worth pausing for a moment before you leap in to a transaction with the bank of mum and dad, and it is certainly worth getting advice first.
For help on this and all mortgage and insurance matters, do give me a call on 07767 692653.