Buying a first home is no easy feat, which is why many first-time buyers turn to the Bank of Mum and Dad for that extra bit of help. If you’re eager to help get your adult children on the property ladder, let’s take a look at ways you can help them take their first step.
How can I help my child buy a home?
The term ‘Bank of Mum and Dad’ refers to parents who offer financial support for their children’s major life expenses, such as buying a house. This is usually through a gifted deposit or a loan, but if you can’t afford to gift a large sum of money, there are mortgage options available to help them buy their first home:
- Retirement interest-only mortgages
- Guarantor mortgages
- Family offset mortgages
- Joint mortgages
- Joint Borrower, Sole Proprietor mortgages
Gifted deposits
If you have the means to gift your child enough money for a deposit, this is the easiest way to help them onto the property ladder. Many mortgage lenders will allow gifted deposits from family members, but you will need to provide a Gifted Deposit Letter and supporting documents confirming the following:
- Your photo ID and proof of address
- How much you’re gifting
- Your relation to the mortgage applicant
- Where the funds are currently
- Confirmation that it is a gift and that you won’t have any financial or commercial stake in the property (usually a written statement)
- Proof that you are in a financial position to gift a deposit.
It’s important to note that this lump sum is officially a gifted deposit, therefore you will not have any stake in the home, and it is not a loan.
Tax implications
There won’t be any immediate tax to be paid by you or your child if you opt for a gifted deposit. However, a bill could be due further down the line. In the UK, every individual is allowed to give away up to £3,000 a year with no inheritance tax charge. Your unused allowance can be carried over from the previous year, meaning that two parents could potentially gift their child up to £12,000 without having to pay inheritance tax. Any more than this, and you will likely be liable for inheritance tax.
Guarantor mortgages
This type of mortgage allows you to act as a guarantor for your child by putting up savings or your property as security. If you decide to use savings, you can earn interest on them but they will technically be off-limits for a fixed period or until the amount owed falls below a certain threshold.
Acting as a guarantor can help your child secure a mortgage, but the risks are significant and shouldn’t be overlooked. If the borrower cannot keep up with their mortgage payments and the home is to be repossessed, you could lose some or all of your savings. If you used your home as security, then you too could lose your home in the worst-case scenario.
Family offset mortgages
Family offset mortgages link the borrower's mortgage deal to a family member’s savings account, resulting in reduced interest rates for the borrower. While this is a great option if you are in a good financial position, you will not earn interest on your savings once linked to a family offset mortgage. Plus, if you wish to withdraw some of the cash in your savings, the borrower’s mortgage payments will increase as a result.
Joint Borrower, Sole Proprietor mortgages
In a JBSP mortgage, you can join as a borrower along with your child. This means that your income and credit history are considered when determining mortgage eligibility and affordability. This can be particularly helpful if your child's income alone is not sufficient for the desired mortgage amount.
While your child will be the sole owner of the property, all parties are equally responsible for repaying the mortgage. Defaulting on payments can have serious consequences for both the child's and the parent's credit scores and financial stability.
Joint mortgages
As a joint mortgage holder, you'll be equally responsible for repaying the loan along with your child. This means you need to be confident in your collective ability to meet the mortgage payments.
Decide how the mortgage repayments will be handled. Will you and your child split the payments evenly, or will one party be responsible for a larger share? Having clear communication and a written agreement can prevent misunderstandings later.
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