First time buyer guide
The Bank of Mum and Dad
In today’s housing market, where first-time buyers often have little cash available towards a deposit and securing a good mortgage deal can be hard, parents are sometimes the only solution.
How the BOMAD Can Help
Parents are mostly helping their offspring by:
- Giving them a lump sum of money, as a gift, towards the deposit: a good sized sum will open doors to mortgage deals, but mum and dad will have to watch out for Inheritance Tax. If the cash gift is over £3,000 a year, they cannot die for seven years after giving you the money in order for it to be tax-free.
- Lending the money: a property solicitor can draw up a document for you and your parents to sign. This document would state things like the repayment plan, any interest you might decide to pay on the amount borrowed, what happens if anyone passes away or if your parents need their money back. The loan document would have to be declared to the mortgage lender so that it can be taken into account in your affordability assessment.
Alternative Ways the BOMAD Can Help
Some parents simply can’t afford to give or lend a lump sum of money, but gladly there are many more ways they can help. Here are some alternatives:
With a guarantor mortgage your parents are guaranteeing that they’ll step in should you fail to make any repayments. The cash the bank lends you will depend on, both, yours and your parents’ income and assets. This means you should be able to borrow more.
Parents & Family Offset Mortgage
This type of mortgage will give your parents, or other family members, flexibility to put savings into an account linked to your mortgage. However, because the savings are offset against the loan, you can’t touch that cash. The money is there to serve as a deposit towards your property as well as to reduce the overall debt. Your parents or family members will, eventually, be allowed to withdraw their money.
Buy With Your Child (Joint Mortgage)
A joint mortgage will have you and your parents cited both on the deeds and on the mortgage agreement. This means that:
- Your parents will have authority over future proceedings (they can leave their share of the property to who they like in their will)
- They will also be responsible for repayments you can’t afford
- Your parents might have to pay Stamp Duty charged on second properties
The upside of joint mortgages is that, because you’re combining incomes, you might be able to access a larger loan.
Family members or friends can treat you to a lump sum of money to put towards all or part of your house deposit. However, they need to know that it’s non-repayable and they’ll have no rights over your property. Your solicitor and your lender will probably want to see bank statements or some other type of document to check where the gifted cash has come from. This is a standard anti-money-laundering test carried out to confirm that the money was earned legitimately.
Remortgage Your Parents’ Home
Some parents decide to remortgage their own property in order to get their hands on some cash to help their children. This could strongly impact their living standards and retirement plans because the new mortgage could have them forking out extra money to cover increased repayments.
If you decide to turn to the Bank of Mum and Dad for help make sure their financial circumstances won’t be put at risk. You all need to understand whether they can really afford to help you. As awkward as it might feel, be open and clear about how you’re all going to go about it. Getting professional advice from a property solicitor can do no harm and might pave the path towards that sought-after property.