Just like petrol and living costs at the moment, house prices are continuing to rise. As it can take years to save for a deposit, it’s harder than ever for first-time buyers to get on the property ladder. More than ever, increasing numbers of hopeful buyers are turning to the “Bank of Mum and Dad” to get a leg up. Research demonstrates that in 2020, nearly 50% of first-time buyers under 35 got help from their parents to purchase their homes.
The mortgage lender market has responded to this and there are now plenty of ways the Bank of Mum and Dad can help. Let’s explore them.
The Topics Covered in this Article Are Listed Below:
Taking a Loan from Your Parents to Buy a Property
A straightforward approach to getting help from your parents is for them to lend you money for the deposit. You should draw up an agreement that sets out the terms of the loan, such as any interest due and the payback period. The agreement should also determine what happens if any of the parties pass away or if your parents request an early return of the loan.
If you’re applying for a mortgage, you’ll have to declare this family loan to your mortgage lender. This is likely to have implications for your mortgage application as loan repayments will reduce the income you have to pay into a mortgage. The lender may offer you a smaller loan. You'll need to shop around, as some banks don’t accept a deposit that is partially or fully funded via a loan.
Getting a Guarantor Mortgage
Another popular route to getting a mortgage with support from your parents is with a guarantor mortgage. With this type of mortgage, your parent or close relative – such as a grandparent – guarantees the mortgage payments. If you're unable to meet your repayment obligations, your guarantor is legally obliged to step in. If your guarantor also gets into financial difficulties, the security they included as part of the application is at risk. This means that they could lose their savings or have their home repossessed.
You can remove your guarantor down the line if you’re able to prove that you are sufficiently financially stable.
Guarantor mortgages are less common than in previous years. Many lenders have replaced their guarantor product with a similar arrangement called a joint borrower sole proprietor mortgage. With this arrangement, relatives can include their income as part of the mortgage application without becoming a joint owner of the property.
There are a couple of key differences. Under a joint borrower sole proprietor arrangement, the relative is a full borrower with equal responsibility for meeting the mortgage payment obligations. With a guarantor mortgage, the guarantor must simply commit to taking on the mortgage payments if the borrower gets into financial dire straits.
The Family Offset Mortgage
A family offset mortgage involves linking your parents' or relatives’ savings account to your mortgage, offsetting the amount of the loan which is interest bearing. For example, if your parents agree to put up £50,000 of their savings for a proposed mortgage of £250,000, you’ll only be paying interest on £200,000. This means lower repayments and less total interest paid on the loan.
A Cash Gift to Boost Your Deposit
Another popular route is for parents to give their children cash to top up their deposit savings. A bigger deposit means buyers may be able to get a lower loan-to-value (LTV) mortgage, and potentially borrow more money and access better mortgage deals.
Most lenders will accept a deposit that has been partially or fully gifted from a relative. However, they could ask for a formal confirmation that you received the money as a gift. This is to ensure that the donation was not in fact a loan that may affect affordability checks. It’s also necessary to clarify this and make sure no one else has a stake in it in case they need to repossess the property.
You won’t have to pay tax on a monetary gift used to boost your deposit, nor will your parents. However, you may be liable to pay an inheritance tax, if the gift exceeds more than £3,000 per parent per year following on from the date of the loan. For example, if your parents loaned you £30,000 two years ago but both have now passed away, you may have to pay inheritance tax on £18,000.
Taking Out a Joint Mortgage with Your Parents
Another option is to take out a joint mortgage with your parents. In contrast to the joint borrower sole proprietor mortgage, with a joint mortgage, your parents are named on the title deeds. The advantage is that their income is considered, meaning you could be able to take on a larger loan and afford a more expensive property.
The big drawback in taking out a joint mortgage is that if your parents already own a property, the house you’re buying will be classed as their second property and be subject to the second home Stamp Duty surcharge – an additional 3% on top of the standard rate.
Also, your parents would be liable for any capital gains tax liabilities if the property is sold at a profit down the line.
A Family Deposit or Springboard Mortgage
A family deposit mortgage – which is also known as a family assist mortgage – allows your parents or relatives to borrow against the equity in their home and offer this as a gift towards your deposit. This can make a no-deposit mortgage possible.
Meanwhile, a Family Springboard Mortgage may also open up the prospects of a 100% mortgage. With a mortgage of this type, your parents or relatives can transfer the equivalent of a deposit – say 10% of the property's purchase price – to a savings account held by the lender. This is then put up as security on the mortgage loan. Your relatives will earn interest on this savings account and after a set period, and assuming the mortgage payments have been kept up, they'll be able to transfer their savings out of the account.
The Pros and Cons of the Bank of Mum and Dad
While it’s natural that many parents want to help their children get on the property ladder, especially when they are struggling to buy their first home, it’s important to take a balanced assessment of the benefits and risks before you move forwards.
The benefits of the bank of Mum and Dad include:
- You may be able to buy a better home – either bigger or in a more appealing neighbourhood. This may mean you’ll stay longer in the home, minimising the costs of moving and property transactions.
- You have more lender options. A more substantial deposit potentially means a lower LTV and lower interest rates. It also, therefore, means lower monthly repayments.
- The funds are a tax-free gift. If your parents are still alive seven years after gifting you the money, you won't be liable for inheritance tax.
The drawbacks of using the bank of Mum and Dad include:
- It may contribute to family tension. If your parents help you but not your siblings, this can lead to friction within the family. Also, certain forms of support will require ongoing good communications and joint decision-making. If you fall out with your parents or relatives, this may complicate matters with the mortgage.
- If your parents gift you a deposit, offer you a loan or link their savings or home equity to your mortgage, it reduces their options. Potentially, they may struggle in the future.
- If your parents loan you money for your deposit, it may have consequences for your mortgage. The loan may reduce your options and affect your affordability assessments. This may create issues.
- Your parents will have to provide information on their finances and – depending on the mortgage product – go through a credit and eligibility assessment themselves.
However, for many people, particularly those buying their first home, the bank of Mum and Dad can prove to be an extremely valuable resource.
If you need further information on this topic, don’t hesitate to get in touch with one of our expert advisers, and we can discuss your options. Enquire online today or call 0330 433 2927.
How Much Can I Borrow?
This mortgage calculator examines your income and works out how much money a mortgage lender might provide you with
On this page you’ll find our LTV (loan-to-value) calculator that you can use to work out the LTV on your mortgage.
First-Time Buyer Mortgages
If you’re thinking of buying your first home, discover the latest advice and the best first-time buyer mortgages available on the market with John Charcol today.
Mortgage Deposit Guide
How much deposit will you need for your mortgage? We explain how mortgage deposits work, what LTV is, how your deposit affects your mortgage and more.
Gifted Deposit Mortgage
Can you get a mortgage with a gifted deposit? Find out now in our guide. We explain what gifted deposit is, how it works, the benefits, risks and more.