For first-time buyers in this day and age, getting a mortgage can be tough. For some, the ‘Bank of Mum and Dad’ is able to step in. But, if parents do help their children to get a foot on the property ladder, how does it all work?
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
Yes, you can if you wish to. In the UK, property prices have risen quickly and salaries haven’t caught up, so getting a mortgage can be very hard for a first-time buyer. Plus, large deposits are needed.
For this reason, it’s become fairly common for parents to buy their children a house. Or, if they’re not buying it outright, many parents help their children with the deposit that’s needed to get a mortgage.
Only you can answer this question. You’ll need to think about:
Your financial situation
Your relationship with your children
Your approach to parenting
Your reasons for helping
How you’d like to help.
If you decide to go ahead and lend a helping hand, you’ll need to be sure that you’re going about it in the right way. You’ll need to think about protecting your own interests, as well as your children's.
Getting on the property ladder for the first time is harder and more expensive than ever. Living costs are high and salaries are low, which can make saving for a house a long and challenging process.
Often, first-time buyers will need a minimum deposit of 10% of the purchase price. They could need a lot more. Many first-time buyers find it difficult to secure an affordable mortgage deal with which to purchase their new home. This is especially true if they have a small deposit.
However, as a result of the COVID-19 pandemic, a new government-backed mortgage scheme has been set up for lenders. It will help people with five per cent deposits to get onto the housing ladder. Through the scheme, lenders are given the option of a government guarantee on 95% mortgages. It means many first-time buyers will have an affordable route to buy a home for up to £600,000.
Even scraping together a 5% deposit can be hard. For a £200,000 house they would need a £10,000 deposit. Many people find it difficult to save up this amount, so a lot of first-time buyers get some kind of help with their purchase. This often comes from the Bank of Mum and Dad.
However, it can still be possible for your children to buy their first home if you can’t help them. Our guide explains how to get a mortgage with little or no deposit.
The easiest way to help is to give your child enough money for a good-sized deposit as a gift, if you have the means to. In the current mortgage market, that could be anything from 5-25% of the value of the property. A 10% deposit or more will open the door to a broader choice of mortgage deals for them.
This is called a ‘gifted deposit’. You wouldn’t have any stake in your child’s house, and it’s not a loan.
There are no immediate tax implications for giving a gifted deposit currently. However, any gift you do give could be subject to inheritance tax if you pass away within seven years of giving it to them.
Most mortgage lenders are happy to allow gifted deposits from family members.
However, if you are gifting a deposit to your child, it’s likely that you’ll have to provide a Gifted Deposit Letter and supporting documents. These should confirm:
Your name and their name
Photo ID and proof of address
How much you’re gifting
Where the funds are currently
Your relationship to the mortgage applicant
A statement that it’s a gift
A statement that you won’t have any financial or commercial stake in the property
A statement that if the money’s loaned, it won’t have to be repaid until the property is sold
Proof that you’re in a financial position to provide the gift. This could be, for example, bank statements showing the source of the money, or regular deposits if they’ve been saving for a long time. Or it could be a Will if it’s a result of inheritance. This is to comply with anti-money laundering checks.
It will have to be signed by a witness, too.
Your child may also need to provide a bank statement demonstrating that the gift came from you.
Dishing out large sums of money isn’t for everyone. You might need the money back, or you might just not agree with handing out cash. But there are still ways you can help if you wish to.
You can loan them the money and charge interest each month. If you charge interest, it would need to be less than the market rate for the loan to help. Otherwise, they could just borrow from a bank. Think about setting down a repayment schedule at the start. You could even formalise the arrangement via a 'promissory note' which would need to be drawn up by a property solicitor.
You can get the money back if and when the property is sold. When you give your children money for a deposit, you can have a 'deed of trust' drawn up by a solicitor. This sets out how much money you’ve contributed and how you’ll get it back if your child sells the property in the future.
Your children shouldn’t have to pay income tax on the money you give them. However, it may impact their eligibility for some means-tested benefits.
If you’re child is buying a house with someone else, and you’re gifting money, you’ll want to protect the money you have gifted. You can do this with a deed of trust (also known as a declaration of trust), which you can have drawn up by a solicitor.
The deed of trust will state who the money was gifted to, so it can specifically state that it was money gifted to your child. That means that if they break up and sell the property, your child will get that money back. Alternatively, if it was given as a loan, it can state that the money must be paid back to you. This is a legal document but, if your child and the other person got married, it could affect the deed of trust.
The deed of trust can also help the people buying the property in terms of specifying who is responsible for what outgoings. It can even clarify what would happen to the property if they were to split.
If you don’t have spare cash available, you can use your own property or income to help raise a deposit. You should think carefully about whether this is something you wish to do.
Here are some of the ways you can use your home to raise cash for your child.
You can use your own home to borrow money, in the form of a secured loan. This means using your own home to guarantee the loan.
Finding the right deal and keeping interest payments to a minimum is essential, so shopping around is a must.
Remember, though, that if things go wrong, your home would be at risk. So would your child’s. This isn’t a decision to be taken lightly.
Here’s how homeowner loans work, and what you need to consider before you apply.
You can use an equity release scheme called a lifetime mortgage to borrow money against your own home.
This is a way to give your children their inheritance early. You borrow money, on the understanding that it will be repaid after your death, via the sale of your home.
Typically, you can borrow up to 50% of the value of your home (depending on your age and health) and won’t have to make any repayments. Interest is added to the lump sum that must be repaid after your death.
This isn’t a straightforward option so it is important to do your homework and learn about equity release before jumping in.
To understand the features and risks of equity release, talk to a lifetime mortgage company. Ask for a personalised illustration. Check that this type of mortgage will meet your needs if you want to move or sell your home, or if you want your family to inherit it. If you’re in any doubt, seek independent advice. Your home could be repossessed if you don’t keep up repayments on your mortgage.
There are also ways you can help your children without taking out a loan.
Your child can borrow more if you allow your income to be taken into account, as well as your child’s. There are several options if you wish to go down this route.
You can help your child buy a home without directly lending them money, by acting as a guarantor on their mortgage.
This means that when they agree a mortgage deal, your mortgage is taken into account, which could allow your child to borrow more.
As a guarantor, you’d have to agree to cover any monthly mortgage payments linked to your child's home if they were unable or unwilling to do so.
You could take out a joint mortgage on the property with your child. This would also make you liable for any payments that your child couldn’t afford.
The difference here is that you’d legally own a share of the property. What share – if any – of the monthly payments you take on could be agreed with your child.
If you do invest in your child’s property as a joint owner, remember to update your Wil.
Your child could get an offset mortgage. That means you’d have flexibility to pay off some of their mortgage for them, either as a lump sum or via regular payments. You could also withdraw the money you’d paid at a later date if circumstances changed.
Any money you put in would reduce the overall mortgage debt. This means repayments would fall as a result. Of course if you later withdrew any of your money, the overall debt would rise again. This means the monthly payments would increase.
A ‘mutually exclusive’ mortgage scheme allows you to earn money on your savings while still helping your child to get a mortgage.
You deposit funds in a savings account linked to the mortgage, and this acts as a guarantee against the mortgage debt. This guarantee enables your child to secure a mortgage without needing a large deposit.
The catch is that your savings must remain untouched until a pre-agreed portion of the mortgage debt is paid off.
There are risks in all of these approaches. For instance, if you simply give money to your children, what happens if you need the money at a later date?
Similarly, what happens if you’re a guarantor on your child's mortgage, but find yourself unable to make the mortgage payments if required? Like any mortgage, there’s always a risk that you could lose your home if things go badly wrong.
Before taking any of the routes described here it is important that you:
Think carefully about whether you can really afford to help. Don’t just think of your situation now, but look at what your situation is likely to be over the next five to 10 years
Get professional advice from a property solicitor
Read and understand all terms and conditions before signing up to a mortgage you’re named on
Make sure your child gets the best mortgage deal that’s available to them
Contact an independent mortgage broker if you have any questions at all.
Pros and cons of helping your child to buy their first house
It’s undoubtedly a generous act to help your child to buy their first house but, as with anything, it comes with pros and cons.
The pros are:
If you’re still unsure whether you can afford to lend a hand, or are uncomfortable with the risks, there are other ways your child can buy their first home.
Saving for a deposit is never easy. One way you could help is by offering for your children to live with you while they save up, so they can cut down their outgoings.
You can also suggest these seven ways to save for a deposit for more tips. There are ways to buy a home without a deposit, like Help to Buy. So even if you find you can’t help your kids, they shouldn’t give up hope.
Whether you are looking to move up the property ladder, downsize or just relocate we can help you find the right mortgage when you move home.