Like many people, you can’t wait to get your foot on the property ladder but are stumped by the huge mortgage deposit you need to find. This is when the Bank of Mum and Dad comes in handy.
What is the Bank of Mum and Dad?
With property prices being so high and deposits typically standing at 10%, it’s very challenging to find the money you need to proceed. Your parents can help you with this and there are several choices to consider:
- A gifted deposit
- A loan for the deposit
- A family offset mortgage
- A guarantor mortgage
- A joint mortgage
A gifted deposit
This is the easiest route but it’s not always feasible. A gifted deposit means your parents are able to give you a lump sum for your mortgage deposit. Your lender may want written confirmation that it is a true gift to ensure that it’s not actually a loan, which will need to be repaid, and that your parents don’t expect a claim in your property should it need to be repossessed in the future.
A loan for the deposit
Not all parents are in the financial position to be able to gift a deposit. An alternative is to loan you the deposit and an agreement can be made between you as to when the money is to be repaid. This could be in monthly instalments, for example, or in full when the property is sold. You also need to agree on whether you’re going to pay interest on the loan. Take into consideration unforeseen circumstances too, such as your parents needing their money back or the death of someone included in the loan arrangement. Your solicitor can set this agreement up for you.
You need to notify your lender about accepting a loan for the deposit because it will affect your affordability of the mortgage as the loan repayments will have to be factored in as part of your expenditure.
A family offset mortgage
A family offset mortgage means your parents can keep savings in an account that’s linked to your mortgage. This reduces the amount of interest you pay on the mortgage loan. For example, if the loan is £180,000 and the savings total £20,000, you pay interest on the balance of £160,000.
Your parents will still retain control of their savings although they won’t receive any interest. They can’t get their savings back, however, until the majority of the mortgage has been repaid, such as 80% of the property’s value.
A guarantor mortgage
Another option is for your parents to be your guarantors. This means they guarantee that your mortgage will be paid if you are unable to, with their assets being used as security. If you fail to make your mortgage payments, your parents must make them.
A guarantor mortgage is handy even if you do have a deposit as you might have a bad credit rating or be self-employed, both of which can make it harder to get approved for a mortgage. You can also find 100% guarantor mortgages although the interest rates can be very high for these.
Your parents will be tied into the mortgage agreement until the lender is satisfied that you can cover the debt yourself. This will be when you’ve significantly reduced the loan to value ratio of your mortgage.
A joint mortgage
A joint mortgage is exactly that — you can take out a mortgage with your parents and be jointly liable for the repayments. As a joint mortgage takes your combined incomes into account, you’ll benefit from being able to take out a bigger loan. However, if one of you stops paying the mortgage, it falls to the other party to pay it.
Another thing to consider is that if your parents are already homeowners, your new property is considered to be their second home so an extra 3% stamp duty will be added to the cost.
The benefits of the Bank of Mum and Dad
Being able to put down a bigger deposit with the help of your parents means that more mortgage deals will become available to you. You’ll also be in a position to buy a better property or look for one in a better area. Having a bigger deposit means you don’t need to borrow as much and will hopefully get a lower rate of interest so that you can benefit from lower repayments each month.
With a gifted deposit, the money is tax-free as long as your parents don’t die within 7 years — otherwise, inheritance tax becomes due.
The negative considerations
Your parents will need to provide proof of funds to the various parties involved, such as the lender and your solicitor. This could be in the form of certified ID and bank statements and is necessary to confirm where the money is coming from.
After gifting money, some parents are left struggling if they failed to assess their financial position correctly. It’s important for them to take the time to work the figures out properly and not become overstretched as a result of helping out. Your parents also need to make the right decision about which route they choose to help you with and, in the case of a loan, when it needs to be repaid and whether interest is to be paid on it or not.
Accepting a loan can negatively affect your mortgage as the lender will take the repayments into consideration as part of your expenditure. The lender may also have an issue with accepting the deposit loan from your parents as they will have an interest in the property.
Should you use this option?
If help is available to you, then this is a great way for you to get your foot on the property ladder. The Bank of Mum and Dad can help you overcome deposit issues, a bad credit rating or your employment status.
As long as everything has been carefully taken into consideration and both parties are clear about the terms, the Bank of Mum and Dad is an invaluable way for your parents to help you secure your first home.