The Bank of Mum and Dad is a term used to describe the financial assistance parents provide to their children when purchasing a property. With rising house prices and tougher mortgage requirements, many first-time buyers, who are fortunate enough to be able to do so, turn to their parents (or grandparents) for help. In this article we outline the implications of gifting or loaning money to your children and explore alternative ways to support them in buying a property.
Gifting a Deposit
One of the most common ways parents help their children purchase a property is by providing a gifted deposit. This lump-sum gift can be used to cover some or all of the required deposit. Making it easier for your child to secure a mortgage. However, there are a few key considerations when gifting a deposit:
Legal Documentation
It’s essential to provide a written and signed letter stating that the funds are a gift and not a loan. This will ensure mortgage lenders accept the deposit.
Inheritance Tax (IHT)
While gifting a deposit is generally tax-free, it may be subject to IHT if the donor (i.e. the parent) passes away within seven years of making the gift. It is important to understand the potential tax implications before gifting money.
Loaning Money for a Deposit
Alternatively, parents may choose to loan their children the money for a deposit from the bank of mum and dad. This approach allows parents to eventually recoup their investment, but there are important factors to consider:
Legal Agreement
It is crucial to have a legally binding agreement outlining the terms of the loan. This should include interest rates, repayment terms, and any other conditions. This will help protect both parties in case of disputes.
Mortgage Lenders
Some mortgage lenders may be reluctant to approve a mortgage if the deposit is a loan, as it may affect the applicant’s affordability assessment. It is essential to discuss this with potential lenders before proceeding.
Guarantor Mortgages
Another option for parents to help their children buy a property is to become a guarantor on their mortgage. This means that the parent agrees to cover the mortgage payments if the child is unable to do so. This can help children secure a larger mortgage, but parents should be aware of the risks involved:
- Financial Responsibility – Parents are legally responsible for covering the mortgage payments if their child defaults, which can put their own finances at risk.
- Credit Score – If the child fails to make mortgage payments, it can negatively impact the parent’s credit score. Making it more difficult for them to secure credit in the future.
Joint Mortgage
Parents can also consider entering into a joint mortgage with their child, where both parties are named on the mortgage and property deeds. This can help secure a larger mortgage and better interest rates, but there are potential drawbacks:
- Tax Implications: Parents may be subject to additional taxes, such as capital gains tax, if the property is not their primary residence.
- Future Borrowing: Being named on a joint mortgage can affect a parent’s ability to borrow in the future, as they are considered financially responsible for the mortgage.
What to Consider
Before deciding how to help your child buy a property, consider the following factors:
Financial Situation: Assess your own financial situation and long-term plans to ensure you can afford the chosen method of support.
Legal Advice: Seek legal advice to understand the implications of your chosen approach and to draft any necessary legal agreements.
Tax Implications: Consult with a financial advisor to understand the tax implications of gifting or loaning money, entering a joint mortgage, or acting as a guarantor.
Speak to a Mortgage Adviser
For some the Bank of Mum and Dad is playing a crucial role in helping first-time buyers get on the property ladder. There are various ways to provide financial support but whatever you do always discuss you options with a mortgage adviser.
Our recommended mortgage advisers will guide you through process and help you make the right decisions based on your personal circumstances.
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Always remember that however you buy your first home, it may be repossessed if you do not keep up repayments on your mortgage.
Last Updated: June 5th, 2023
