What is the Bank of Mum and Dad?
A recent report from Legal and General revealed that the ‘Bank of Mum and Dad’ now contribute to 26% of funds to the UK housing market. And if Mum and Dad were an actual bank, they would be the 9th biggest lender in the market.
84% of parents are helping their children get on the property ladder, 57% are doing that with a gift, 18.3% are doing it with a no interest loan and 4.8% are doing it as a loan with interest.
The Bank of Mum and Dad started as a phrase and has become a very real thing. Many parents are having to help their children get on the property ladder – saving for your first home is not easy. And sometimes the deposit is the main factor, but for other people, it’s actually the affordability. There’s lots of different help available for all of the different scenarios. And we’re going to share how your Mum and Dad can help you get on the property ladder and all of the different ways they can do it.
Gifting money towards a property – how does it work?
So the first thing that your Mum and Dad can do is gift money. There’s a big difference between being gifted money and being loaned money – lots of mortgage applications involve a gifted deposit. So this is a gifted amount of money that the child uses as a deposit. It’s really important that we know if the parents are expecting the money back, because if they are expecting the money back, we have to take these payments into consideration when working out how much you’re borrowing and how much you’re able to borrow.
It has to be taken into account as a loan, as a commitment. Now on the whole, mortgage lenders do prefer the money is gifted and the difference here is if it’s gifted, your parents have to sign a letter detailing how much they’ll be gifting and that they do not want the money back – that the money does not need to be repaid and that they therefore have no interest in the property.
Gifted deposit letter
If your parents are gifting you money for a deposit, you will need them to write that letter. We have a template available for you. A lot of lenders have their own templates as well, but we know exactly what the wording needs to be. We will talk you through that and we’ll tell you exactly what that needs to say. Often we’ll give you the template and your parents can then fill in the blanks and sign it.
This is needed for the mortgage lender, but it’s also needed from our perspective, just to make sure that everybody is in agreement, that the money is not being paid back and that we don’t need to include it as a loan.
So that’s the most common way that people help their children get on the property ladder is by gifting a deposit. However, that is not always possible for every parent. It’s a lot of money and there are other options out there if you don’t want to gift the money. If your parent don’t want to gift you the money, but you do want to find out ways that they can help you…
Have you heard of the Family Springboard Mortgage?
If you are struggling to save that deposit, there is something called a Family Springboard Mortgage from Barclays. We’ve actually done many, many cases on the Family Springboard Mortgage.
How does it work?
How it works is you own the property but use your family or friends savings as a deposit to buy your own house with your own mortgage, and they get their money back with interest. You don’t need a deposit. You can borrow the full purchase price of your home because your helper provides 10% of security for five years, and this acts as your deposit.
If you’re the helper, i.e. if you’re the Mum and Dad, family, friend etc, you can help someone buy their own home. You don’t have to be their parents. How you do that is you open a helpful start account in your name, which is linked to the mortgage, and you transfer 10% of the property purchase price into it. That is then used as security on their mortgage.
In five years time, you will get an attractive rate of interest on your savings for the agreed term. It’s typically five years and you can help more than one family member or friend get their own place at the same time. Once you get your money back, you can obviously do it again.
If you’re the homebuyer you don’t need a deposit, you can use these savings. So you have 10% into a helpful start account and that will be your deposit. And then you’ll borrow 90% of the purchase price. They’ll need to keep it there for five years. As I say, you can borrow over 35 years, which can make things a lot more affordable for you, but we will look at the mortgage term completely tailored to you.
You select a fixed rate for five years so that you know exactly what your mortgage payments are going to be, and that they won’t change over that time. So it can work brilliantly because the person who wants to help gets their money back and the person who needs the help gets the property and doesn’t need to find a deposit. So that’s a really, really good scheme with Barclays that we can help you with.
Another option is a Guarantor Mortgage…
Now the other way that you can help (as a parent) is you can actually go on the mortgage as well. So if affordability is the problem, and it’s not really about the deposit, then you can go on the mortgage. And there’s a few ways that you can do this. So lots of people use the term Guarantor Mortgages, and this is basically where the guarantors income is taken into account when lenders work out how much you can borrow.
Joint Borrower Sole Proprietor
There’s something called joint borrower, sole proprietor, which is very similar, and that’s where there’s two of you on the mortgage, but the property will only be in one person’s name.
That’s sometimes really, really important to people that want to get on the property ladder. They don’t want their parent to be on the deeds because that could involve a lot more stamp duty potentially, but also they want to own their own property. They don’t want to own the property with their parents.
So you can go on the mortgage, but you don’t have to go on the deeds, which is really useful. And particularly, as I say, with stamp duty, if you own your own property or multiple properties, you do have to take into account that there is an additional 3% stamp duty for any additional properties that you own over the first one.
That can add up to a lot of money.
First time buyers get a relief with stamp duty (at the time of recording the episode) so that’s going to be something you want to avoid if possible. Now, if you are thinking about having a Guarantor Mortgage, you need to take into account that the guarantor will need to be able to afford all of their own current commitments and lifestyle, as well as that mortgage. So you do need to look at affordability and a lender will look at it in exactly the same way as normal. So do bear that in mind. But it is a really good way of helping. There are lenders out there who will let as many as four applicants on one mortgage, and that can really help boost the income!
Are there any downsides to having a Guarantor Mortgage?
Now, the negatives of that is we have to take into account the age of your parents. If they’re going on the mortgage with you, when we’re taking into account the term. This is what can cause issues for lots of our clients who look to do this. Lots of you look to do this when you’re not just first time buyers, but when you’re looking at potentially splitting up with your partner and you’re wondering how can you borrow this money on your own.
That’s when we see this happen, a lot. What you’ve got to take into account is a mortgage lender is going to lend to retirement age generally. And so if your parents are not far away from that, then the mortgage payments can be quite high and that can affect affordability. But there are lenders that will go up to age 80.
It’s not the be-all and end-all, if your parents are in your fifties or sixties, they can still help, but you just need to bear that in mind.
What about lending money to your children as a payback loan?
If you do want to lend your children money or your parents are thinking about lending you money you do need to bear in mind that the lender is going to take it into account as a loan. Some lenders won’t accept borrowers if they take a loan to fund their deposit, even from parents. So it can be more tricky if you’re doing it that way. It’s not impossible though, so you just need to sort of let your mortgage broker know, and they can look into the options there. It’s perfectly understandable if you want the money back, but that’s where the family scheme may come into account and is a better way round of you doing it.
I’ve talked about Guarantor Mortgages and joint mortgages.
With Guarantor Mortgages sometimes a charge is placed against the Guarantors house. Now, what this means is that if you are the borrower and you don’t pay your mortgage payment, that your guarantors home could be at risk.
Talk about it!
So it’s really important that you do have these really upfront conversations going into this – it’s a big deal for your Mum and Dad to help you. You do need to be able to have those difficult conversations around money. I would say that’s essential and uncomfortable, but essential because otherwise that’s what can lead to arguments later on. It’s serious, especially if someone is becoming a Guarantor, they need to seek their own legal advice so that they fully understand the commitment that they’re taking on. We recommend that they do that every single time as do the lenders.
What about the Family Mortgage from the Family Building Society?
There are other ways that we can help. There’s a lender called the Family Building Society. So it’s no surprise that they do a family mortgage, which helps buyers with a low deposit to purchase a property using security provided by their family and the principle behind it is quite simple. It helps families help their take the first step on the property ladder. So as long as you have at least 5% deposit (and that can be gifted) and you have family that will give additional security by using their savings or having a charge on their own property, they are happy to help.
They can do 95% mortgages without the need for a gift or loan. And they have different rates obviously available and different affordability.
Now how it works…
Family members can help by providing security in one or a combination of three different ways, either:
- With family savings,
- With value in a family property or;
- Offsetting part of the mortgage.
So I’m just going to talk you through the savings. So they would put their savings in the family security account, which earns them interest too. If a buyer can find a 5% deposit from savings or a gift, then the family mortgage allows a family member to provide security for the buyer’s mortgage in, by depositing savings in a family security account.
If the house is sold and the property is in negative equity, there is a risk that the money in the family security account may have to be used to make good any shortfall. So you do need to make sure you’re getting all that legal advice around it because it’s good when it’s good.
We’ve got a case study that I’m going to talk you through just to try and help your understanding here, of how this would work in a real life scenario…
We’ve got the Wilson’s story. So George Wilson is 55 years old and he earns a reasonable income as a teacher. His stepdaughter, Christine, has recently graduated from University and he’d like to help her buy her first home. However, he doesn’t have savings to spare. Christine has saved seven and a half thousand, a 5% deposit towards buying the flat she’s chosen.
She wants to borrow £142,500. However, George can’t spare any cash, but he does own his home. The family mortgage will allow George to use some of the value of his home as security for Christine’s mortgage. And by doing this, he can help Christine get a more favourable interest rate than she would otherwise be able to get.
He is not using the whole value of his home, just the £30,000 needed to secure Christine a better interest rate. And assuming she keeps her mortgage up to date, the charge on George’s property comes to an end. After 10 years, during that time, he is liable for £30,000 of any shortfall should the flat have to be sold for less than the amount that Christine owes on the mortgage. It could mean he’ll have to sell his house to find the money. However, the family building society helped by providing a safety net.
And finally, Offset accounts…
Now there’s one other way that you can help your children or that your family can help you with the Family Building Society. And that is with a family offset account.
How can you offset family savings to reduce the amount of the Mortgage you pay interest on? So I am going to do an episode on Offset Mortgages in general, but this is really important.
We’ve got our case study where Dev is 27 and he’s landed his dream job. He’s finally able to afford the monthly payments on the kind of house he’d like to buy. He saved £10,000 for a deposit. Now, Dev’s grandparents have savings. They want to use them to help him, but they eed the money for their retirement. They’re not able to gift it to him.
They put £50,000 of their savings into an offset account with the Family Building Society. They don’t receive interest on it, which means that the benefit passes to Dev. So instead of Dev paying interest on the full mortgage, he only pays interest on the loan amount minus these savings of £50,000. This reduces his monthly payments and gives security for the mortgage, which means the interest rate he pays is also lower than he might’ve got otherwise. So the money remains his grandparents’ money provided he keeps the repayments up and then they can expect it to be returned in full after 10 years. The precise date will depend on the combination of fixed rate mortgage periods chosen by Dev.
The interest that they lose is likely to be less than the amount that Dev’s saved by not having to pay interest on the full mortgage amount.
So that is another great way a family can help with affordability. They’re a brilliant lender, but they’re one of many who actually do help when it comes to looking for solutions for you that are a little bit out of the ordinary as always.
Why working with a broker is a good idea…
I would always say the best thing to do is find a broker that you know, like, and trust that you can have those conversations with and brainstorm, because actually what you need sometimes is a soundboard. We do lots of Zoom calls with parents. We’ll do a whole family meeting on Zoom so that everybody feels super comfortable and everybody understands exactly what’s happening. The other beauty is we can record all of those Zoom calls. So if somebody can’t make the Zoom call or the Team’s call, then we can record it so that that can be played back to them and they can feel really comfortable with all of it.
It’s a big deal for the child and it is a big deal for the parents. It’s not something that everybody can do and so it’s just useful to know the different ways.
Finally, to summarise…
In summary, if you are thinking about asking your parents to help you get on the property ladder, or if you’re a parent wondering if you can help in some way, you can gift money, you can loan money, you can go on the mortgage and not on the deeds, you can go on the mortgage and go on the deeds. You can have a charge on your property to act as collateral. You can put money into savings accounts, which can act as a deposit or indeed offset some of the interest of your child’s mortgage.
You could remortgage as well, so you could remortgage your house which is still really gifting or loaning money, and obviously there are other options out there that don’t involve a mortgage such as personal or secured loans.
Just think really carefully, make sure you’re getting legal advice. If you’re a parent, make sure you’re fully understanding what the risks are.
Money is very emotive and it can be very awkward to talk about, but if you are thinking about going into an arrangement with your children, you’re going to need to have those conversations and get really comfortable about talking about the uncomfortable. We are extremely passionate about helping people get on the property ladder and extremely passionate about making sure people understand exactly what they’re doing when it comes to their mortgage.