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Brokers need to push ‘Bank of Mum and Dad’ borrowers to get legal advice ‒ analysis

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  • 03/10/2019
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Brokers need to push ‘Bank of Mum and Dad’ borrowers to get legal advice ‒ analysis
First-time buyers who are purchasing with the help of family should be pushed to get legal advice, alongside their parents, brokers have suggested.

Research released this week by Just Group suggested that around 61 per cent of people that bought their first home in the last five years did so with financial help from their family.

This is a sharp increase from the 20 per cent seen in the late 1980s.

According to Legal & General, the ‘Bank of Mum and Dad’ is worth around £6.3bn this year, with parents handing over an average of £24,100 to aid their children purchase a home. That’s up by more than £6,000 from last year.

But while parental help has become a more common occurrence, it can present challenges for brokers looking to guide clients through the variety of options open to them.

Getting legal advice

Jane King, mortgage adviser at Ash Ridge Private Finance, said that mortgages where parents lodge their savings with the lender rather than gifting the child a deposit have become more popular.

“More lenders are offering these options and making a point of marketing them, although not all are available through advisers.”

She added that advisers have to be careful with these sorts of deals, and ensure that the parents take legal advice so that they are aware of the ramifications should the child fall behind on their repayments or there is a massive falling out.

She continued: “Family Building Society and Barclays offer two good family assisted options and when it works it’s a really good idea.”

The process should be clearer

Paul Flavin, managing director of Zing Mortgages, said that with so many baby boomer parents sitting on significant housing equity, releasing cash to help their children buy a house “seems an obvious thing to do when the options are seeing them paying more than the cost of a mortgage in rent payments or, worse still, having them not leave home”.

However, he urged lenders to “make the entire process a little more linear”, noting the recent Springboard mortgage from Barclays was a step in the right direction.

Flavin continued: “Why can’t banks offer a mortgage to the borrower linked to a second charge for the parents property at a rate reflective to the main mortgage? This way you could create a mortgage for up 100 per cent loan to value without the risks of exposure this would normally create.”

When is a gift not a gift?

King emphasised that a gift is still the most common way for parents to help their child buy a home, but noted that she has had cases where the family did not realise that the funds they were handing over were not a loan and were expecting it to be paid back in the future.

She added: “Again I recommend they take independent legal advice, especially when they are gifting to a child who is purchasing with a spouse or partner.”

Partnering with other brokers

Stuart Powell, managing director of Ocean Mortgages, said that aligning parental expectations with those of their children can be challenging with these cases.

“We prefer for a mortgage broker to help the first-time buyer and for us to help the parents release equity from their property,” he said. “Working together in this way is highly beneficial for the clients who often can get a lower mortgage rate, and benefits both businesses.”

Powell added that brokers who don’t handle equity release themselves need to consider partnering with later life advisers in order to better handle cases with parental help, and argued that going with an independent equity release adviser rather than a national one opens up the potential for negotiating “a higher fee sharing agreement than the national companies, and you are supporting fellow smaller business owners”.

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