Updated 03 December 2020
Lots of parents across the country are helping their kids get on the property ladder by lending (or giving) them money for their deposit. This trend of dipping into ‘the bank of mum and dad’ is booming, and there are a few routes that parents and aspiring first-time buyers can take. There’s a range of special mortgages to help, like offset, guarantor and family deposit mortgages - but how do they all work?
One of the simplest ways that parents can help their kids to buy a home is by gifting them some money. All buyers need to put down some money upfront to get a mortgage, and this deposit typically needs to be 10 per cent to 20 per cent of the value of the property being purchased. Usually that means saving up at least £15,000 and probably more, so a large cash injection from parents can really help.
Even if parents do have a large lump sum on hand, they may not be in a position just to give it away. One alternative is to sign an agreement whereby the money is repaid in due course – either with or without any extra value the property may have gained. Another way is to set up a loan agreement to repay the money in monthly instalments.
Some parents simply won’t have the cash available to offer a gift or loan. However, they can still help out. Family deposit mortgages allow parents to use the equity in their current home (i.e. the proportion of it that they own outright) to give their child a lump sum for a deposit. Often, the lender will then offer a lower interest rate on the loan. Each provider has a different process for releasing the money, so independent mortgage advice will help your family find the most suitable arrangement.
Another possible solution is for parents is to become guarantors of their child’s mortgage. With a guarantor mortgage it is the parents’ assets and income that are used as security, and the parents who are ultimately responsible for the loan being repaid. This means that if the buyer (i.e. their child) misses a payment, the parents will have to pay it instead.
In some cases, a guarantor mortgage can be a 100 per cent mortgage (i.e. with no deposit needed); however, these mortgages are hard to come by and can have very high interest rates.
Yet another option is an offset mortgage. With this type of loan, cash savings can be kept in an account that is linked to the mortgage, reducing the amount on which interest has to be paid. So if the loan is for £150,000 and the buyer has £20,000 in savings, interest is only charged on £130,000 – so monthly repayments are lower. This is a way for parents to help out if they can’t afford to gift their money outright, as they can access their savings if necessary (though this would increase their child’s monthly repayments).
Even if you think you know which arrangement will work best for you, a major decision like this should be made with independent advice. With parental homes and/or savings potentially at risk, both buyers and their parents should meet with an IFA or mortgage adviser to decide the best solution. You may also decide to take some legal advice from a solicitor.
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