Key Partnerships - Banking on mum and dad article

Banking on Mum & Dad

The surprise and welcome announcement in Chancellor Kwasi Kwarteng’s Mini Budget that there’ll be significant and permanent changes to Stamp Duty will help first-time buyers (FTBs) in particular.

But with house prices now expected to rise again, the dream of home ownership can still be beyond those on lower incomes or those living in expensive areas of the country like the South East. Will the Bank of Mum and Dad now have to play an even bigger part in the UK’s property purchase process?

How first-time buyers benefit from Stamp Duty changes

On Friday (23/9), the Chancellor announced plans to make a raft of changes to Stamp Duty Land Tax (SDLT) in England and Northern Ireland.

In particular, FTBs will now benefit from having nothing to pay on properties up to £425,000 (previously £300,000) and only 5% on the excess on properties up to £625,000 (previously £500,000).

Along with other amendments to the rules, these changes will make it more affordable to move home and much easier for FTBs to get onto the property ladder.

What impact the changes have

If we look at some calculations based on typical house prices in London, and more widely across England*, you can see the difference this tax change will have on the finances of a first-time and a standard buyer.

	Avg house £*	SDLT (old)	SDLT (new)	Saving
London (FTB)	£537,920	£16,896	£5,646	£11,250
London (stnd)	£537,920	£16,896	£14,396	£2,500
England (FTB)	£304,867	£243	£0	£243
England (stnd)	£304,867	£5,243	£2,743	£2,500

Tax break still not enough for some

It’s certainly welcome news that the Government is focused on maintaining and promoting a healthy, vibrant property market.

With so much wealth tied up in the bricks and mortar of British properties, many older clients will find themselves increasingly reliant on this cash reserve as a source of retirement funding.

But for those just starting out on the property ladder, home ownership – even with this tax break – is still a distant dream for many because of the size of deposits now typically needed to secure the best mortgage rates.

Although figures will of course vary considerably from region to region, analysis from RightMove earlier this year suggests that the average, single FTB now needs a deposit of almost £75,000, assuming they could get a mortgage at 4.5x salary for a typical house.

This is a 112% increase from the amount needed just a decade ago. A couple purchasing together fare much better but would still require around £22,000.

The Bank of Mum & Dad

No wonder, then, that more and more FTBs are relying on the Bank of Mum and Dad (BOMAD) to help fund their house purchase, using the equity in their parents’ homes to help top up their own savings.

According to data from Key, around £1m of housing equity was released every day during the last Stamp Duty holiday (introduced by the previous Chancellor) to help fund house purchase deposits.

It’s not unreasonable to assume, therefore, that this new SDLT regime will spark further house purchase activity and increased pressure on BOMAD to step in and help secure the dream home for their children and grandchildren.

And these deposits can make a huge difference to the person buying a home.

The impact equity release can have

Equity release gifting could help younger generations pay off their mortgages five years sooner in London, a little over eight years sooner in the South**, and even by 12.5 years in the East Midlands, according to more2life. This equates to half the length of an average first mortgage.

By gifting equity to children or grandchildren to fund a deposit of £69,376 - the average deposit required for purchasing a home in London*** - parents or grandparents could help secure a lower LTV for their loved ones and therefore a cheaper rate mortgage.
Should the FTB be able to pay the same monthly repayments as someone who purchased without that level of deposit, they could pay off their mortgage in a substantially lower amount of time.

Even in London, a first-time buyer could save 20%, or five years, allowing them to start putting savings of their own towards other expenses.

The importance of expert advice

We will have to wait and see what long-term impact these SDLT changes have on the housing market both in terms of the volume of sales and the prices of housing stock across the UK.

But with the Bank of Mum and Dad now a major part of the lending chain in the UK house purchase process, specialist advice is now more important than ever to ensure the best customer outcome for those in need of funds and those with the assets to unlock them.