In today’s property market, the bank of Mum and Dad, (and increasingly, the Bank of Gran and Pops), is as relevant as ever with an estimated 60% of first-time buyers receiving some financial help from family members.
For most parental (or grand-parental) bankers, the greatest difficulty is generally finding the cash! However, this hurdle should by no means be the start and finish of the exercise.
Christy Bartlett , Stacks Property Search, has this advice: “As bankers, it should be your responsibility to ensure your investment has been a wise one – to protect your own interests and those of the family members you are helping.
Our advice to parents or grandparents who are gifting or loaning finances for a property purchase is to be clear at the outset about the rules of engagement. If you wait until the perfect property has been found, it’s too late – emotions get in the way, and everything will happen too quickly. You’ll find yourself being the bad guys when you start asking questions and imposing conditions.
Before you commit to anything, work out exactly what you can afford, whether it’s a gift or a loan, and if you have other children / grandchildren, whether you’ll be able to do the same for them when the time comes. You may want to consult and take advice from your financial adviser in this respect.
Once you’ve established the amount you can comfortably afford, it’s sensible to offer it on the condition that you will be involved in the decision-making process.
Start by asking the following questions:
- What kind of property do you want and / or need?
- Where do you want it to be and why?
- Where do you think your life will be in 5 years / 10 years / 20 years?
- How much mortgage can you afford, and what will your payments be?
- What do you anticipate your monthly running costs will be?
- Do you anticipate buying something that requires improvement / work?
- Have you considered a lodger?
- What is your thinking on resale / capital growth and exit strategy?
They won’t necessarily know all the answers to these questions, but you will have started to get them to think along the right lines and to encourage debate and discussion. The chances are you have bought a good handful of properties in your life and will have gathered experience and knowledge along the way; first time buyers are wet behind the ears and there will be many factors that they haven’t considered.
It’s vitally important that they buy something they can afford; they should make a good assessment of the financial obligations in terms of mortgage payments, outgoings and maintenance – service charges, council tax, utility bills, repairs etc. First time buyers may not be familiar with these responsibilities.
The purchase should be sensible and make long-term sense in terms of geography and size, and should meet resale criteria, but remember it is essentially a home. Don’t make decisions based on capital gain rather than what makes sense in terms of a safe and happy roof.
Think about other potential sharers, either family, partners, possibly tenants, and in the longer term, children. A one-bedroom property is very limiting. Just because a certain amount of money is available, don’t feel compelled to spend it! If something perfect is available that comes in under budget, don’t rule it out.
Don’t underestimate the importance of good transport links, and not just those that suit your current place of work. The chances are your work location will change several times in the future. The situation is further complicated if they are buying with a friend / partner, especially the latter where emotions may get in the way of correct financial etiquette.
While it can make good financial sense, there are additional considerations to be taken on board. It doesn’t sound romantic, but it’s sensible to talk about things that might not usually be brought up at this stage in a relationship, running all potential scenarios through in conversation. However strong a relationship is, it’s vital to consider what would happen in the event of a break-up as you won’t be covered by the matrimonial laws that protect married homeowners. Buying a property together is a huge commitment to each other and there needs to be a high level of maturity involved in the decision.
In addition to all the usual documents, the solicitor should draw up a ‘declaration of trust’ for both parties to sign that sets out the detail of who has contributed what, and what happens in the event one or both parties wish to sell.”