If you’re a manager in the Bank of Mum and Dad, then you may have some serious thinking to do if one (or more) of your children wants to buy a property and needs your help. Harsh as it may sound, it may be in everyone’s best interests for you to consider the situation in much the same way as a commercial lender.
Loan or gift?
That said, the first question is one which is unlikely to be considered by any commercial lender. Are you making a loan or are you giving a gift? If you give your children a gift and live for another seven years, then (under current rules) it will be discounted from the value of your estate when IHT is calculated.
On the other hand, if you give your children a gift of money now, you will not be able to use that money yourself if you need it later. You should therefore only give a gift if you are sure you can afford it. You should only give a loan if you are sure you can afford to do without the money for the relevant length of time and you are confident your child can pay back the money.
Family credit checks
If you’re considering making a loan to a family member, then you need to be very clear about one of the realities of lending. You only get repaid if the borrower has money to repay you. In principle, if the borrower owns an asset, like a house, you may be able to secure the loan against it. In practice, there are complications with this.
First of all, asset prices can go down as well as up. This means that, at any given point in time, the borrower’s home might not be worth enough to pay back the amount borrowed against it.
Secondly, if the homeowner is a family member, are you really going to take any action which might cause them to lose their home? Are prepared to risk ending up on seriously bad terms with them? Could there be repercussions with other people to whom you are close?
What are you going to do if the borrower’s circumstances change through no fault of their own? The obvious example here is redundancy, but even younger people can get ill and/or have accidents.
In short, before you even consider making a loan to a family member (or anyone else), think long and hard about the practicalities of repayments.
Using your own home equity to help your children
Be very careful about either using equity release or increasing your own mortgage to help your children with a property purchase. Either of these approaches could lead to complications with your own retirement.
Similarly, be careful with downsizing. If you’re downsizing purely to release equity in your home without taking on debt, then you may come to regret the decision. If you’re downsizing because you want a smaller property anyway, then be careful not to overestimate how much you will save by doing so.
The safest approach would be to downsize yourself first, see what profit you made and then decide what to do with it. That way, you’re dealing with a known situation. If this is not possible, then it’s highly advisable to err on the side of caution when creating your estimates.
Keep in mind that overestimating how much you will make on your current property and/or underestimating the cost of a new home could leave you financially stretched even without financing your children. You also need to consider the transaction and moving costs. In particular, think about what will happen if you buy after the current Stamp Duty freeze has come to an end.
Your property may be repossessed if you do not keep up repayments on your mortgage.