First-time buyers can face major financial challenges when trying to buy a property.
Whether it’s struggling to save enough money for a deposit or not being able to borrow enough to buy the home they want, many first-timers seek help from their parents and the so-called ‘bank of mum and dad’.
But what are the options for parents who want to help their children take that first step on the property ladder?
Here, we’ll explain the ways you can help and the things you’ll need to consider before lending your son or daughter money to buy their first home…
What is the bank of mum and dad?
Parents lending their children money to help them buy their first home is becoming more and more common, leading many to dub the trend the ‘bank of mum and dad’.
Through the pandemic, it’s estimated parents lent their children £8billion, while parents have previously contributed as much as 26% of all funds in the UK property market – putting the ‘bank of mum and dad’ in the country’s top-10 lenders.
How can I lend my children money to buy a house?
There are several things you can do to help your child buy their first home, including:
- A financial gift
- A loan
- A joint mortgage
- A guarantor mortgage
- Remortgaging your home
1. A financial gift
Many parents ‘gift’ their children money to boost their deposit when buying a home.
A larger deposit can mean they need to borrow less from a mortgage lender, meaning they may be able to access a cheaper interest rate.
However, if you’re planning to gift your children money, there are some key things you’ll need to consider…
Your child’s mortgage lender
Many lenders will be happy to accept a deposit where some or all of the amount has been gifted by a parent.
But they’ll want written confirmation from you that the amount you’ve gifted isn’t a loan.
A loan would affect your child’s borrowing potential, while the lender will also want to be sure that you don’t have an interest in the property should your child get into financial difficulty in the future.
Gifting and inheritance tax
In the UK, each person can give away up to £3,000 a year without any inheritance tax being due from the recipients.
So, if you’re married, you could gift up to £6,000 a year without your child having to pay any inheritance tax in the future.
If you haven’t gifted any money in the previous year, meanwhile, you can carry over your allowance to the following year, meaning you could give away up to £12,000.
Any gifts exceeding the annual allowance could mean your child has to pay inheritance tax in the future.
If you die within seven years of making a gift above the annual allowance, inheritance tax could be due if your estate is worth more than £325,000.
Always seek independent financial advice before making any gift over the annual allowance.
2. A loan
If you’re unable to gift your child money towards their deposit on a home, or you don’t want to, you could consider loaning them money.
By loaning your child money, you won’t have any inheritance tax considerations to make as the money will be paid back.
If it isn’t, it will be classed as a gift.
Draw up a legal loan agreement
If you do decide to loan your child money for their first property, you should draw up a legal agreement that outlines when the loan needs to be repaid and if any interest is due.
The agreement should also set out what happens to the loan in the event of death or if the property is sold.
Your child’s mortgage lender
Parental loans are classed as debt, so your child’s mortgage lender will take the amount of money you’re loaning them into consideration when assessing their borrowing capability.
This could impact how much your child is able to borrow, while some lenders may decline your child’s application as their deposit would be classed as a loan within a loan.
3. A joint mortgage
You may be able to take out a joint mortgage with your child, adding your income to theirs so they are able to borrow the money they need for their first home.
Of course, you’ll still need to be working in order to take out a joint mortgage, while you’ll also have equal responsibility for repaying the loan alongside your child.
Additional stamp duty
If you already own a property, your child’s new home would be classed as an additional property, meaning you’ll have to pay a 3% stamp duty surcharge.
First-time buyers are also entitled to stamp duty relief on the first £300,000 of a property’s purchase price, but your child would not be eligible for this if you own your property or have owned one in the past and you’re buying with a joint mortgage.
Capital gains tax
Capital gains tax may apply when your child sells their property if it’s jointly owned by you and classed as a second home.
4. A guarantor mortgage
Your child may be able to take out a mortgage with you acting as a guarantor.
This means if they’re unable to meet their mortgage repayments, you would become liable for them yourself.
Guarantor mortgages are less common than they previously were, but some are still available.
Your existing property
To be considered as a guarantor, your child’s lender would need to be satisfied that you can meet your own commitments as well as your child’s should you need to.
By becoming a guarantor, you would potentially be adding an additional financial commitment if you have a mortgage on your own home.
5. Remortgaging your home
Depending on your circumstances, it may be possible for you to remortgage your own home and release some equity.
This money could then either be gifted or loaned to your child to boost their deposit.
Increased interest and more risk
If you remortgage, you’ll end up paying more interest on your property and if you’re unable to meet your repayments in the future, your home could be at risk.
So, this option should be considered at extremely carefully, alongside solid independent financial advice.
Tips for helping your child buy a home
- Make sure your child is fully aware of the terms of any loan
- Draw up an agreement if you’re loaning your child money for a deposit and ask a solicitor to make it legally binding
- Keep communicating with your child and encourage them to let you know if they’re struggling with their mortgage payments, as this could affect you if you’ve taken out a joint or guarantor mortgage
