With property prices at an average of 11-13 times salary, it’s become increasingly difficult for first-time buyers to get on the property ladder. The average UK house price now stands at over £285K (correct as of July 2023).
This means borrowers need to find in excess of £28,500 to obtain a 90% LTV mortgage or £65,000 for an 80% LTV product. With other high living costs, many first-time buyers are struggling to afford their own home without help from parents or other family members.
If you are a parent who either has cash savings or equity in your property, you can help your child get on the property ladder using a gifted deposit, a lent deposit or help with regular monthly payments.
What are the mortgage options for first-time buyers who have help from parents?
There are a couple of different options enabling parents to support their child’s house purchase. This could include providing the house deposit or using combined incomes to meet mortgage affordability calculations.
A joint mortgage is an option for parents wanting to support their children in buying a property. However, with a joint mortgage, the property is jointly owned by all those on the mortgage. This could have capital gains tax implications for parents who already have another property or cause family disagreements if one party wants to sell and the others do not.
Joint Borrower Sole Proprietor mortgages
A joint borrower sole proprietor mortgage is a type of guarantor mortgage where both incomes of the child and the parent are taken into account by the lenders but only the child is listed as the property owner. This enables borrowers to get onto the property ladder with a smaller income, with the mortgage payments backed up by the parents.
Guarantor mortgages mean the additional borrower does not have any decision-making rights over the property, including whether to sell, renovate or maintain the property.
Offset mortgages are products that allow a borrower or parents of a borrower to offset a savings account against the mortgage to reduce the mortgage interest payment, making the mortgage more affordable. These products, also known as a family offset mortgage, mean parents who don’t want to give their child a lump sum for a deposit or are concerned about the impact of inheritance tax from a gift, can still support their child to buy a property.
There are only a few offset mortgage deals where a family member’s savings can reduce interest payments so finding a lender for this type of mortgage might be easier if you use a mortgage broker.
Parents or grand parents may opt to release equity from their own home via a Lifetime Mortgage or Equity Release. This is usually for over 55s and is more common where parents or grand parents have no mortgage on their own home and want to release funds from their home to gift to children. Interest can be rolled up and not paid each month.
How much can parents give their children to help them with their mortgage?
Parents can give their child money to pay the deposit and as long as they survive for at least seven years after the financial gift there will be no inheritance tax to pay.
What is the difference between a gifted deposit and a lent deposit?
A gifted deposit is one where there is no intention that the money be paid back. When gifting money, there may be an effect on your inheritance tax (IHT) liability. As each individual has an annual inheritance tax allowance of £3,000 and you can use any unused allowance from the previous tax year, a child could receive £12,000 in total from their parents as a tax free gift without having to worry about IHT. If the amount gifted is larger than this and less than seven years pass, there will be an IHT liability.
Lent deposits are treated differently from gifted deposits. You’ll require written evidence that the loan will only need to be paid back once the property is sold. It may be harder to find a good mortgage deal where the lender will accept lent deposits.
Do you have to declare to the mortgage lender how the deposit was obtained?
Mortgage lenders will check how you obtained your deposit as part of Anti-Money Laundering (AML) laws. This means you will need to show who provided the deposit if it was not from your own income. You’ll need to show your bank statements and other information about your own finances and that of your parents to satisfy your lender’s usual borrowing criteria.
What to consider before helping your child get their first property
It’s a big decision to buy a property with someone else so it’s important to think carefully before you offer to help out on your child’s mortgage and take on a joint loan agreement.
The main implication of helping your child with a deposit lump sum is that you might end up with an IHT bill. If you help them via a joint borrower sole proprietor mortgage there will be no immediate tax to pay or future inheritance tax bill.
Getting involved with a family member’s mortgage can lead to arguments and strains on relationships as a result of financial ties. Although helping your child with their mortgage means lower monthly repayments, it could come with unintended consequences that lead to problems between you, so think carefully before going ahead and formalise everything in writing.
Get mortgage advice from Simmonds Mortgage Services today
Family offset mortgages, guarantor mortgages and JBSP mortgages are specialist products in the mortgage market. To find competitive deals, you can get in touch with Simmonds Mortgage Services on 01184 693037. We have experience in finding the best deal for clients looking for these types of products.
Frequently asked questions about Bank of Mum and Dad mortgages
Can my mum and dad pay my mortgage payments off?
Yes, your parents can help you by making payments towards your mortgage up to the annual allowance of £3,000 per year without worrying about IHT. If money gifted is greater than this, there could be taxes to pay in the future.
Can my parents pay my stamp duty?
Parents can contribute to stamp duty in the same way as they can for a deposit. This is not a loan and will therefore fall under the normal inheritance tax laws.
Can my parents buy a house and put my name on it?
Yes, your parents can add you to the deeds of the property but this comes with various potential taxation issues and could be fraught with problems should your child wish to dispose of the property or get married and then divorce. Tax affairs can be complex so it’s best to seek the advice of a family lawyer and personal taxation specialist so you understand the potential issues involved.
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