The Bank of Mum and Dad: how to help your children onto the property ladder
Giving your children or grandchildren a helping hand with their mortgage is a rewarding way to help your family and there are several ways in which you can help
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The Bank of Mum and Dad will have always played a major part in your child's life, but its biggest role yet could be to help them buy their first home.
Buying a first property can be a struggle, with sky-high prices and stagnant salaries placing homeownership out of reach for many of the younger generation.
As a result, plenty of wannabe buyers are turning to the so-called Bank of Mum and Dad to get a leg-up onto the property ladder.
More than half of first-time buyers under the age of 35 were given money towards a deposit by parents in 2020, according to the latest figures from Legal & General (opens in new tab).
The average handout was about £19,000, with one in five receiving more than £30,000.
So what are the different ways you can help?
Make A Gift
The simplest way is to give money towards a deposit from savings or investments. First-time buyers need to find at least 5% of the property’s value to put down as a deposit or, ideally, more than that for a lower mortgage interest rate.
You can hand out as much as you like toward a deposit, but any large amount could be subject to inheritance tax (IHT) if you die within seven years of making the gift. You can give up to £3,000 a year, though, free from IHT.
Andrew Montlake, managing director of mortgage broker Coreco (opens in new tab), says, “Most lenders will require a letter to state that the money is a gift, and that the person giving the money will not have any share in the property.”
Bear in mind, too, that a financial gift is money you won’t see again, so you must be sure you won’t need it yourself to put towards retirement, or for any other reason.
Offer a loan
You could offer an interest-free loan instead, with clear repayment terms, to help your children or grandchildren onto the property ladder. But you’ll need to consider how much they will repay, as it could affect their chances of getting a mortgage.
“The lender will take any loan repayments into account as part of the assessment process when deciding how much they’ll lend,” says David Hollingworth from broker L&C (opens in new tab). “If you are lending money towards a deposit, check the lender is happy to accept this, too.”
Go for a family mortgage
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You can use your savings to help with a deposit with a special type of “family mortgage”. You hold savings in an account that’s linked to the mortgage, so the buyer can borrow up to 100% of the property’s value. Your savings act as the deposit, and remain locked away, usually for three to five years. This money is then returned along with any interest, providing mortgage repayments have been kept up.
This is a good option if you want to offer financial assistance, but don’t want to lose access to money you may need at a later stage. Terms and conditions vary, so it’s important to check the details carefully.
For example, Barclays (opens in new tab) offers a Family Springboard mortgage, lending up to 100% of the purchase price. You put savings amounting to a 10% deposit in an account that can be accessed in five years, with this money acting as extra security for the lender.
Guarantor mortgages are becoming less commonplace, but they are an option. You are guaranteeing that if the buyer fails to make repayments, you promise to cover them. Before signing up it’s important to be aware of the pitfalls, as this is a major commitment.
You are essentially using your own savings or property as security for the mortgage. If a child misses their repayments, the lender could potentially force you to sell your home, for example, in the worst-case scenario.
Boost their borrowing power
You can apply for a joint mortgage with your younger relative. Your income will also be included on the lender’s assessment, increasing their borrowing potential.
“These days, while the mortgage is in joint names, increasing borrower power, the property is usually in one name,” says Montlake. This way, the parent isn’t on the title deeds and the purchase won’t be subject to the stamp duty surcharge on a second home (if you’re already a homeowner) or capital gains tax when the property is sold.
How to help your children save for their own home
If your child is currently living at home, help them to do the buying groundwork. This could reap rewards when they come to buy, and teach them money-management skills.
Credit scores: There may be ways they could improve their credit score. This is one of the major factors lenders will check when they come to apply for a mortgage. Taking out a credit card and paying off their balance each month could boost their score. They must ensure not to miss any card or bill payments. They can sign up to check their score for free with Experian (opens in new tab), or Clearscore (opens in new tab), for example.
Savings accounts: Encourage them to open a Lifetime ISA—and check out our guide to the different types of ISA available to you. This is available to anyone aged 18 to 39, with savings boosted by 25% (up to £1,000 a year) through a government bonus. This money can be put towards a deposit (or retirement).
Government schemes: You could also look into government schemes with your child that make buying a new home more affordable. Help to Buy equity loans are available on new-build homes, for example. The government lends up to 20%, or 40% in London, of the property’s value interest-free for five years. Or shared ownership schemes enable buyers to purchase, say, just 25% of the property, and rent the remainder.
Harriet is a freelance journalist and editor specialising in personal finance. She is a regular contributor to the broadsheet national newspapers, alongside writing for a range of magazines and websites. Most recently, these include the Guardian, The Observer, MoneySavingExpert and Forbes Advisor. She’s won national awards for ‘cutting through the jargon’ around subjects such as pensions and investments.