Bank of Mum and Dad

The amount of up-front costs involved in buying a home, slow wage growth and an unpredictable housing market are making home ownership seem a distant dream to many without dipping into ‘the Bank of Mum and Dad’.

Over £6 billion is reportedly ‘borrowed’ from parents a year, to help finally get onto the property ladder. *
But what does this really mean, and what are all the routes available for parents and aspiring first-time buyers?

1. What is the ‘Bank of Mum and Dad’?
The term ‘Bank of Mum and Dad’ is a little misleading, as few parents act like a bank.  Only around 15% of those who help with mortgages take financial or legal advice and there is usually no written record of transactions**. Research has also found that they don’t discuss repayment arrangements and there is rarely any interest included.
There are many special mortgage options available for these situations; but how do they all work?

2. Building a deposit
Gifting some money is one of the easiest ways that parents can help their children buy a home.  A deposit is typically up to 20% of the value of the property – normally meaning at least £15,000 needs to be ready before you even get the house.  A cash input from parents at this stage is probably the most helpful.

3. Parents who want to help, but can’t give that much away
Those who help their offspring on to the property ladder are not always high earners. Many are pensioners, or at least semi-retired, so have built up their wealth through savings, homeownerships, inheritances and investments.
Parents may not always be in a position to give away any large sum straight away, but one alternative may be to set up an agreement that the money will be paid shortly, or a loan agreement to repay the money monthly. Make sure you let a mortgage adviser know about these plans, they can be included in any applications you have.

4. Can parents still help if they don’t have any spare cash?
Family deposit mortgages help parents use any equity in their home (this is the amount of the house that they own outright) to provide a deposit with a low interest rate.  It’s always advisable to contact a mortgage adviser to make sure you find a suitable deal for you and your family.

5. What other options are there for parents to help their offspring get a mortgage?Parents often act as guarantors for home purchases to boost the amount that can be borrowed for a first-time purchase. A guarantor mortgage uses parents’ assets and income as security.  This type of mortgage means parents are responsible for the loan, even if their child misses the repayment, it’s them who will have to cover the cost.
Another possible route is an offset mortgage.  This loan keeps cash savings in a mortgage linked account, meaning that there is less interest to pay on the final mortgage amount.  For example, if you take out a loan of £150000, with £20,000 in your saving account, interest would only be applied to £130,000, making overall monthly payments lower

 Your home may repossessed if you do not keep up repayments on your mortgage.

Sources:

*https://www.independent.co.uk/life-style/parents-property-loans-children-money-buy-property-mortgage-a8960806.html
**https://www.moneywise.co.uk/news/2019-01-23%E2%80%8C%E2%80%8C/how-run-bank-mum-dad-parents-kids-need-talk-more-openly

https://www.legalandgeneralgroup.com/media/2483/bomad-report-2018-v15.pdf