Saving up for a deposit can take years. When potential homeowners think they’ve saved enough, they find that house prices have gone further out of reach and then need to save even more for a higher deposit.
One solution to this quest of finding the deposit can be found in the Bank of Mum and Dad (BOMAD). Obviously, this option is not available to everyone, but a sizeable number of people have benefited from BOMAD.
Popularity of BOMAD
According to estate agency Savills, in 2021 BOMAD helped 198,000 households buy their first home, accounting for almost half (49 per cent) of all mortgaged first-time buyers. BOMAD contributed a total of £10.7bn towards the purchase of these homes.
It should be noted that 2021 was an unusual year as housing transactions were higher than normal due to the impact of the stamp duty holiday, introduced to keep the housing market moving during the Covid pandemic.
Savills expects the number of BOMAD-assisted buyers to be lower this year and next. Nevertheless, it believes BOMAD will provide a total of £25bn in gifts and loans between 2022 and 2024, helping half of first-time buyers.
We should remember that BOMAD is not just about Mum and Dad, it can also be Bank of Grandma and Grandad and even include other family members.
So what has this got to do with a lender like LiveMore who lends to people aged 50 to 90+?
Tapping into home equity
If parents and grandparents don’t have savings to gift to their family but want to help out there are options. They can tap into the equity in their home by taking out a mortgage and using some or all of that money to give to their offspring. The money is not always used for a deposit, it could be the children already own a home but it needs improvements, repairs or an extension.
If an interest-only mortgage is taken out, it could be beneficial for tax inheritance purposes. With the value of property rising, the tax inheritance threshold has remained at £325,000 since 2009 so many more people than previously are liable to pay this. Inheritance tax rate is 40 per cent on the part of an estate that’s above the threshold.
If there is an outstanding mortgage, the mortgage balance is deducted from the value of the property and is not included in inheritance tax.
We would advise clients to speak to a tax adviser to learn more about inheritance tax implications.
