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First-time buyers are finding it harder and harder to get onto the property ladder. Saving up a large enough deposit can seem like an insurmountable task, so it’s no wonder that more people are having to rely on their parents to help them get a home of their own.
In fact, research from YouGov in 2022 found that 37% of first-time buyers received help from their parents to buy a property in 2020 or later and since then the cost of living has just gone up and up.
And it’s not just those buying their first property looking to their parents for financial help. House movers are even dipping into the bank of mum and dad to secure their next home.
So, just how can parents help their children buy a house?
This is when parents give money to their children to pay for (or partially pay for) a deposit on a home.
This is widely accepted by mortgage lenders, but there are some caveats.
It must be a gift and not a loan – there should be no obligation for it to be paid back to the parents. In fact, a gifted deposit form or letter which confirms this must be signed by parents and a witness.
The parent must be financially solvent and will need to supply the mortgage lender with their personal information, as well as a bank statement to confirm this.
Tax will not need to be paid on the gifted money straight away, but whether inheritance tax is due in the future will depend on the circumstances.
Parents can gift £3,000 per year without paying tax on it and any unused allowance from previous years can usually be rolled on. Inheritance tax may be required over this amount though.
For example, if a parent hadn’t gifted any money for the past five years, they could give £15,000 towards a deposit, tax-free.
It gets a little more complicated if a parent was to die within seven years of gifting the money. It would then be classed as part of their estate and subject to inheritance tax, that’s if their total estate is worth more than £325,000 including the gifted money.
If that’s the case, the deposit will be taxed according to how much time has lapsed between the gifting of the deposit and when the parent died.
It’s possible to borrow money from a parent for a house deposit.
It would just be a case of setting out the terms and conditions of the loan in writing – it should detail the agreed interest rate, repayment schedule and loan term. It’s important to think through different circumstances and document what would be expected, if for example, the parent needs the money back before the loan term ends.
Borrowing money rather than being gifted it will affect a mortgage affordability check though, as although it’s from a family member, it’s still classed in the same way as a bank loan would be.
Generally using a loan to pay for a deposit is a big warning sign for mortgage lenders and may result in an application being refused.
In this guarantor mortgage scenario, it’s when a parent will use their home or savings as security against a child’s mortgage.
So, if the child doesn’t make their repayments, the guarantor is responsible for paying them.
Although this makes it possible for the child to borrow more than they would be able to on their own, it relies on a shedload of trust.
Relationships can become strained if repayments aren’t made and parents could end up in a huge amount of debt as well. There is a risk that the guarantor may lose their house or other assets if repayments aren't met in time.
It’s possible for children to apply for a joint mortgage with their parents, which could increase borrowing potential as combined incomes and savings are considered.
However, be warned that the property will be jointly owned, which means that if the child falls behind on payments, the parents will be required to make up the shortfall. In the worst-case scenario, they could even have their primary home repossessed.
Finances will be linked as long as the joint mortgage exists, so if the child’s credit score drops, it can affect the parents’ score too.
There are also tax implications with joint mortgages, for instance a second home surcharge of 3% of the property value may be required if parents already own their own home and if the property is sold for a profit in the future, it may be subject to capital gains tax.
A savings account is linked to the mortgage which reduces the amount of interest due, except in this case it’s linked to a parent’s savings account rather than the person applying for the mortgage.
Basically, the amount borrowed from the mortgage lender is reduced by the amount in the linked savings account. This means that the amount of mortgage you need will be lowered, and more competitive rates may be offered.
A lot of the options available do rely on trust between parent and child – if the relationship isn’t already harmonious it could cause a lot of problems when money is involved. Conflict could follow if repayments aren’t made, and the parents’ money or even home is at risk.
If a deposit is gifted, it means the parents will lose a large chunk of their savings, and if circumstances change in the future and they need the money back, this can cause friction.
There’s also a chance that if a property is bought with a partner using parent’s money and the relationship ends, the ex-partner will be entitled to half of that money. However, this can be avoided by getting a deed of trust to protect the deposit.
Taking out a personal or secured loan to fund a child’s house deposit may seem like a viable option, but it’s best to be avoided.
Lenders frown upon debt being taken out to pay for a deposit and many won’t accept a mortgage application that does this. Also, it can put the parents under financial stress.
Children may want to consider taking advantage of one of the government’s affordability schemes for buying a home:
Think through the different options before taking the plunge.
It’s understandable that you’d want to help your child, but you need to think of yourself and your finances first. It’s vital that you consider the ramifications of giving a large amount of money to your children for a deposit or applying for a joint mortgage.
If it puts you under financial stress then it isn’t the right choice – think about other options which will make both parties happy. Always consider your personal financial situation before agreeing to help your child with their mortgage.
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