Parent mortgages – how the bank of mum and dad can help children buy a home
Your kids have made you proud. They’ve made it through University or worked hard to find their first proper job. They’ve done their best to save a little money to use as a deposit on their first home, but because of the state of the mortgage market—and their savings account—there’s just no way they’re going to muster the vast sums needed for a reasonable mortgage amount.
As a proud parent, you want to help. But what can you do?
Here are the most popular ways to give your kids a helping hand on to the property ladder.
Parent-help mortgage options
Before any parent jumps into one of the following options, we suggest all parties seek specialist advice in advance.
We suggest talking to a mortgage broker about the thousands of mortgages and schemes available for families and first-time buyers and a financial advisor about the pitfalls and problems that occur without due care and attention. Whether you can afford to donate money as a gift, provide a loan, choose to release equity, or use the interest from a linked savings account, there's more than one way to land the mortgage deal your kids need.
Mortgage lenders are more than used to parents being part of the plan these days, not only in landing a suitable deal with appropriate mortgage interest payments, but making sure everyone is aware of the advantages and pitfalls of the situation. As well as understanding how any parent-help mortgage impacts lifestyle and financial security, a few well-timed conversations should keep everyone on the same page throughout the duration of the agreement.
As much as you love your children, misunderstandings inevitably happen, leading to tough conversations and dire consequences.
- If you can afford to pay the deposit on your child’s new home, it’s a great way to help them onto the ladder. Even adding to what they’ve saved will help achieve preferable interest rates and lower mortgage payments with a lower loan-to-value ratio (LTV). Lenders need a signed declaration to prove it’s a gift and that the parent or family member hasn’t any legal interest in the property. There are all kinds of elements to consider; for example, if the parent dies within seven years of making the gift, then the entire amount is liable to inheritance tax (if above the exemption amount).
Lending a deposit
- Family loan deposit agreements and family deposit mortgages are for parents who haven’t the resources to provide a gift without clearing out their savings account but can entertain a loan. The lender will need to know about repayment terms, schedules, and costs as they pay interest. A loan adds to the outgoings of the borrower(s), impacting their affordability assessment and, in turn, how much they can borrow.
- As a parent or family member with a home of your own and savings in the bank, acting as a guarantor on your child’s mortgage can ease their risk profile and lower their interest rates. The critical drawback here is if your child defaults on the mortgage, you’ll have to step in to make their monthly payments, and the fault impacts both yours and their credit reports.
- A joint mortgage makes both parents and children responsible for the mortgage and part owners of the property. In addition, parents who already own their home will be responsible for stamp duty on a second property, adding to their expense.
Joint borrower sole proprietor (JBSP) mortgages
- A JBSP mortgage is just like a traditional joint mortgage, but the parental party doesn’t appear on the property deeds, meaning they’ll avoid the extra stamp duty but won’t have any paperwork proving any right to the property.
- Another way a parent can free up cash to help with deposits is to remortgage their own home. They’ll often achieve far better interest rates, covering costs by upping monthly payments or extending their mortgage term. Remember: remortgaging will impact your budget, so be careful that the change won’t affect the standard and quality of life you currently enjoy and expect.
Family offset mortgages
- An offset mortgage links a savings account to a mortgage, utilising whatever interest there might have been on those savings against the mortgage interest. A family offset mortgage is just the same but linking the parents' savings account to their child’s mortgage.
- It’s not a great option and not one that we’d regularly recommend, but it is another way parents or another family member can access capital to help their children and relatives if they don’t have the sum they need readily available.
- When homeowners retire, some decide to release a part or all of the equity achieved in their homes to bump up pensions and provide gifts to their children while they’re still around to enjoy seeing the benefits.
Parents help mortgage best practices
- As we said earlier, to avoid problems further down the line and understand all of your options, talk to the experts first. Mortgage brokers and financial advisors can guide you through all options, helping to avoid the common pitfalls.
- Update your will to include any share in a new property.
- Consider the effects of tax liabilities: stamp duty, inheritance tax, and paying tax on loan interest or rental incomes over the mortgage term.
- Deliver clear and complete explanations of what is expected. Is the money a gift or a loan? Will you expect your children to pay interest? What are the terms, and what’s expected? Being clear from the start will keep things simple as you proceed.
- Consider making a legal agreement. Having a solicitor draw up the ins and outs of the agreement will help deliver smooth solutions if anything unexpected occurs.
- Complete a land registry application to avoid the property being sold without consent.
- Always offer complete transparency to your mortgage provider.
- Include a safety net for changes in interest rates.
- If supporting a child entering a joint mortgage with a partner, be sure to put a ‘deed of trust’ in place in case of break-ups, separations, and divorces.
Alternative schemes for young and first-time buyers
- Help to Buy: Equity Loan – Interest-free loans of 20% (40% in London) for the first five years.
- First Homes – 30% discount on new build homes.
- Lifetime ISA – Savings topped up with a 25% government bonus for 18–39-year-olds.
Talk to CLS Money about parent help mortgages
Our dedicated mortgage advisors are some of the best brokers in the business. We see all kinds of situations and deliver advice on every type of mortgage to all types of borrowers. So whether it’s a traditional parent-child mortgage scheme, like those mentioned above, or for a mum, dad or other family member providing loans for single parents on benefits, we’ve got solutions for everyone.
Of course, your kids will still be expected to meet the minimum lender criteria for the loan amount, with a minimum annual income and appropriate credit score. Applicants will need to pass the usual affordability assessments to qualify for a family deposit mortgage or offset account option.
If you’d like to know more about your options or take a closer look at offset mortgages and what your monthly payments could look like, give us a call or drop us an email today. As an expert mortgage broker, we'll happily guide you through the process, from releasing equity to whole of market family offset deasl. With answers to all your questions, and every kind of mortgage advice, we'll get you—and your parents—on your way to owning your first home.