We’ve all seen the importance of that venerable ‘institution’, the Bank of Mum and Dad, grow over the past decade particularly for first-time buyers as house prices rise far in excess of wages, and the level of debt students leave college and university with continues to grow. Indeed, for many individuals there would be no hope of getting on the property ladder without help from kindly parents or relatives.
One would hope that the need for the ‘Bank of Mum and Dad’ would have started to wane by now, but in fact we are in quite the opposite situation. A distinct lack of housing supply, coupled with a much-changed mortgage market whereby high-LTV products are not available in abundance, makes for difficult times for first-timers. Add in the fact that house prices have continued to soar, and thus deposit levels have gone up, and you can see something of a perfect storm whereby the Bank of Mum and Dad is a much-needed umbrella.
Indeed, we’ve reached a point where many parents are doubling up as buy-to-let landlords now in order to be able to provide their children with a property in the future. This may be especially pertinent for those with younger kids because the assumption has to be that getting on the ladder in a couple of decades will be even more difficult than it is now.
The big question of course is how can clients with buy-to-let properties make such a gift? Again, this could be particularly relevant to those with a number of properties when set against the context of the forthcoming changes to buy-to-let mortgage underwriting. The recent consultation paper from HM Treasury suggests that ‘portfolio landlords’ be defined as those with more than four properties and it is asking lenders to assess affordability far more stringently for them; it may well be that landlords in this situation may want to ‘offload’ property to children, before the finance situation – via buy-to-let mortgages – becomes slightly more tricky.
Not forgetting of course that this type of arrangement may appeal for a number of reasons, notably for inheritance tax purposes, or to reduce that portfolio size, or for CGT planning, for instance.
So, how can the property handover to a child be achieved? Well, one option which advisers might not have used before, but can provide a solution, is to utilise bridging finance. We have seen a case recently where a client who had bought a buy-to-let property for their child to use during University, now had the situation where that child was staying in the University area and therefore the parent could get them onto the housing ladder via that property.
The parents’ rental property was worth £250,000 and they now wanted to move it into their daughter’s name, gifting her £100,000 deposit from the equity in it. A bridging finance provider was able to lend the daughter her required £150,000 mortgage at 60% LTV. Down the line, with the daughter having owned the property for six months, she was able to remortgage to a longer-term solution and benefit from a better interest rate on a low LTV remortgage.
There are of course a number of hurdles to get over with such a case, notably the lender’s valuation would need to be confirmed at £250,000; the property would be registered at the Land Registry as changing hands for £250,000; the £100,000 deposit would be classed as a gifted deposit – which has to come from a relative; and of course, as this is a sale, stamp duty would be payable on the full £250,000.
However, once all these boxes were ticked, it would provide the necessary solution for the parents to sell the property and the daughter to own her first home with a relatively small mortgage to service. In the great scheme of things, the extra interest payable on a six-month bridging loan would not be an issue with the daughter holding £100,000 of equity in the property.
Many parents will be looking to secure property in order to help their children further down the line; however few might have given thought to how they actually utilise the property when the need arises. Of course, many children will not want to live in the actual property but those that do could certainly benefit from the bridging finance option when the time comes.
Jonathan Caplan is director of First 4 Bridging