I’m in a bit of a pinch. My 22-year-old daughter wants to get onto the property ladder in a few years’ time. I know how hard it is for her generation to get their first home with prices skyrocketing. What are my options? Is it time for me to open The Bank of Mum and Dad piggy bank?
Great question. It can be a little scary considering how much housing prices have increased over the years. As it stands the average property in the UK is 10x the average salary. Ouch!
The Bank of Mum and Dad is becoming a much more common port of call for first-time buyers. According to Legal & General, in October 2020, 49% of first-time buyers aged under 35 were helped by the Bank of Mum and Dad to buy property.
As much as two-thirds of these buyers (65%) said they would not have been able to buy without that help. Without it, they would have had to delay by five years. What’s more, in 2020, the Bank of Mum and Dad was lending on average £20,000. Take a note Banks!
But what are some of the options for you and your daughter?
The first place we can start is with a Lifetime ISA ("LISA"). The government created LISAs to help young people get onto the property ladder.
With a Lifetime ISA, you can put up in up to £4,000 a year. On top of this, the government also adds a 25% bonus each year on top. Wahoo!
If your daughter hasn’t opened a Lifetime ISA yet, the best thing to do is to open one as soon as possible. Because if she were to put £4000 into each year for 7 years, the government add an extra £7,000. So she would have around £37,000.
So at age 29, your daughter would have £37,000 she could put towards a deposit on a mortgage. This might not be enough on its own, but it could make a big difference in getting a mortgage. It would also mean that you might not need to give as much money to help your daughter to get her first home. It is worth remembering though that you can only withdraw the money from a LISA if the property price is less than £450,000. So if your daughter lives in London, then make sure you keep this in mind as there are penalties to withdraw the money if the property is over £450,000.
This brings us to the option of loaning money to your daughter. Now, this could either be some of the deposit or the whole amount. This can be risky as once you’ve handed over the money there is no guarantee you’ll get it back. If you do decide to loan the money to your daughter, you'll want to understand her financial situation. You should start by having a conversation about her income and outgoings. This way you'll be best informed to decide whether she could be expected to pay you back the loan.
The best part about loaning the money to your daughter is that you don’t have to charge her interest as a bank would. Although you don’t need to charge interest, it is sensible to have a written agreement. It should make it clear how much will be loaned, how much is expected to be paid back, and when. This doesn’t need to be complex and a simple agreement will be fine. There are plenty of templates which you can find online, such as this one.