Lending a helping hand with deposits - a cautionary tale...

A Warning to the Bank of Mum & Dad as the trend grows for parents to help their children get onto the property ladder and as research shows that half of UK buyers wrongly believe that a Homebuyers Report will identify potential problems with a property. By David Lewis, partner at Grillo LLP Chartered Surveyors.

Surrey, 26th May 2011. Many graduates now leave University with debts typically of £20,000. With the prospects for the economy and labour market looking less than positive over the next few years, how will these would-be, first-time-buyers afford their first home?

After all, lenders continue to restrict the availability of mortgage finance, reserving the best deals for those with only exemplary credit history.

A trend has developed over the past few years where the next generation of first-time-buyers is increasingly turning to parents and other family members for a deposit to secure their first home.

Often, the benefactors also have to step in as a guarantor for the loan. Parents and grandparents are well-placed to lend a hand, often having owned and built up significant equity in a family house over many years. They are increasingly being relied upon to release some of this wealth to enable their children to get onto the property ladder.

But the Bank of Mum & Dad needs to exercise caution because, where the property is being purchased with a mortgage, if there is a substantial deposit, the Mortgage Company will be less concerned about the condition of the property than if a mortgage of 80 or 90% of the purchase price were being offered.

In those circumstances, it will be all the more important for parents or benefactors to obtain independent professional advice about the condition of the property to avoid any nasty surprises.

For it would be the parents or benefactors who would need to extend their generosity and pay for any expensive repairs, particularly during the first few years, whilst children establish their careers.

Therefore, ask yourself the question: where the property is being brought outright, have you or your children given any consideration to its condition or how much routine maintenance it will require?

For peace of mind and purse, you will all want to know that it is safe for occupation and whether you will need to budget for expensive repairs. You can only do this properly if you obtain the appropriate advice about its condition, before exchange of contracts.

There is a further advantage of using a professional third party to carry out a survey. For if, as a parent, you find yourself in the unenviable position that your child has fallen in love with a property, which you can already see has potential problems, you may not want to be cast as the doomsayer.

You might prefer to offer to pay for an independent survey, whereby a professional chartered surveyor identifies and comments on any issues. If the survey confirmed your fears, you could talk through the issues, allowing your son or daughter to walk-away from the purchase without any rancour.

Alternatively, the surveyor may be able to allay your doubts. That stain on the ceiling was a spillage rather than the leaky roof that you had feared.

Ultimately, whatever financial contribution parents are making to their children’s future, it will be part of their inheritance. Parents and benefactors will undoubtedly want to know that their contribution at this stage is being well spent on an asset, which is not in any way inferior.

It may even be a condition of parental help that appropriate independent professional assistance is obtained or you may even go so far as offering to pay for such advice. That way, one can be sure that your money is not being spent on something that is going to be more of a burden than an asset.

And this does not just apply to parents and family helping first-time buyers. Recent research shows that over half all UK home buyers think that a mortgage valuation by a bank, building society or mortgage company is a Homebuyer Report which will identify potential problems.

But, Homebuyer Online points out: ‘a mortgage valuation simply looks at the value of the property for loan purposes and it’s for the lender, not the buyer. It is not designed to show any potential problems’.

“This just emphasises the need for caution and independent professional advice when buying property – whatever the circumstances, and whoever it is paying the deposit,” concludes David Lewis at Grillo LLP.

 

Grillo LLP – Chartered Surveyors is a private independent practice based in Godalming, Surrey. Further information can be found at www.grillollp.com