The Bank of Mum and Dad is the UK’s 10th biggest mortgage lender, according to new data.
Parents will lend £6.5bn to finance property purchases this year, and will be involved in just over a quarter (26%) of all transactions, a study by financial services company Legal and General found.
But how do parents help their children on to the property ladder?
If you’re thinking of offering your child some help to buy their first home, there are lots of routes you can take. Here’s our guide to some of the most popular methods.
- Arranging your first mortgage can be a daunting process, but there is help out there. For impartial, expert advice on your options, call Which? Mortgage Advisers on 0808 252 7987.
1. Gift cash towards a deposit
Putting cash towards your child’s deposit is the most common way of helping them secure their first home.
If you opt for this route, the simplest option is to give the money as a gift, rather than as a loan. A mortgage lender may ask you to provide a written statement confirming your child won’t be making repayments.
Making a loan to your child can be problematic, as lenders will factor monthly repayments to you into their assessment of the mortgage application. This could lower the amount lenders are willing to approve or possibly scupper your child’s chances altogether.
2. Use your savings as security
Rather than gifting your cash as a deposit, you can offer your savings as additional security to your child’s loan. Under this scheme, the lender will generally require you to lock up your savings for a set amount of time in a specified account.
The main drawback to this approach is that you won’t be able to get your hands on your money if you need it – in some cases, for several years. You might also not be getting the best interest rate on your savings, and may not be able to switch if a better rate is offered elsewhere.
Family Springboard mortgage
The Barclays Family Springboard mortgage allows first-time buyers to get on to the property ladder without a deposit, as long as their parents (or another family member) can put up 10% of the property’s price as security.
The Family Springboard mortgage involves parents opening a savings account (called a Helpful Start Account) and depositing 10% of the property’s price.
As long as the child keeps up repayments, the parents will get their savings back after three years, with interest.
3. Use your current home as security
Alternatively, you can use the cash tied up in your home – known as equity – as security on your child’s mortgage.
Doing this can be a risky business, as your property will be on the line if your child defaults.
Family Deposit mortgage
Nationwide’s Family Deposit mortgage allows people with existing Nationwide mortgages (or those switching from another lender) to borrow against their equity and gift the funds to a family member as a house deposit.
While this allows parents to tap into the value in their home, both the parent and their child must have mortgages with Nationwide, considerably narrowing their mortgage options.
- Whether you’re using your savings or equity to help your child get a mortgage, it’s best to look at the full range of options before jumping in. Check out our full guide on guarantor mortgages
4. Buy a property together
Getting a joint mortgage is a way of giving your child a leg up while retaining some control over your money.
If you get a joint mortgage, both of your financial situations will be taken into account and you’ll both be named on the deeds.
However, doing this means you and your child will be financially linked. This means if your child defaults, you’ll be liable for their payments.
It’s also worth remembering that if you already own your own property, you might need to pay a higher rate of stamp duty, as you’ll technically own two homes.
- For more information on how joint mortgages work, take a look at the guide from Which? Mortgage Advisers
5. Help your child save for a deposit
There are longer-term ways you can help your child save for his or her first home.
Once your child reaches the age of 18, they can open a lifetime Isa, which allows deposits of up to £4,000 each year.
The biggest benefit of using a lifetime Isa is that the government will pay a 25% bonus on any savings if you child buys a house worth up to £450,000.
However, very few lenders offer lifetime Isas at the time of writing. In the meantime, a Help to Buy Isa could be a wise choice. This account also offers a 25% bonus, but has stricter saving limits in place.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.