How can parents help first-time buyers?
High house prices, tough affordability checks and the need to save a large deposit can make it hard for first-time buyers to get a mortgage and buy their first flat or house.
The good news is that there are a range of solutions available if you, as a parent, want to give your child a helping hand on to the property ladder. In this guide we explain all your options, from guarantor mortgages and joint mortgages to gifting a deposit, and give 10 top tips to parents considering the 'Bank of Mum and Dad' route.
The experts at Which? Mortgage Advisers can advise on the best option for your circumstances.
Video: how you can help your child buy a home
Check out our 90-second video below for the basics - we go into more detail on each option further down the page.
Gifting or lending a deposit to your child
Some parents boost their child's deposit by offering them cash towards it. If you're thinking of doing this, there are a couple of things you'll need to be aware of first.
Firstly, your child's mortgage lender may require proof that the money came from you.
If you're gifting the cash, you can usually provide a letter confirming this and stating that it won't need to be paid back.
If you are lending them the money, you'll also need to confirm this as the lender will want to factor repayments in its affordability calculations.
You may also be required to sign a declaration that you have no legal interest in the property, and your child's conveyancer might request bank statements as proof of the cash gift or loan as part of their money laundering checks.
- You can find out more in the guide on gifted deposits by Which? Mortgage Advisers.
Mortgage options for parents who want to help first-time buyers
If you want to help your child buy a home but don't have enough savings to simply give or lend them the cash, there are several options you can consider.
With guarantor mortgages, the amount your child can borrow is based on your income and assets, as well as theirs.
You’d be guaranteeing to meet any repayments that your child failed to pay, which could be risky, especially if you still have a mortgage on your own home.
- Find out more: our full guide explains how guarantor mortgages work, and offers information on alternatives, including family offset mortgages, family deposit mortgages, flexible family mortgages and 100% mortgages.
Which? Mortgage Advisers can explain how they work and help you apply.
A joint mortgage considers both your and your child’s income, as well as any money outstanding on your own mortgage.
You'll usually both be named on the mortgage agreement and on the deeds, providing you with some power over any future transactions. But you would also be liable for keeping up the mortgage repayments and, if you already own a property, you'll probably have to pay the second home stamp duty surcharge.
- Find out more: Which? Mortgage Advisers' guide to joint mortgages
Joint borrower sole proprietor mortgages
With a joint borrower sole proprietor (JBSP) mortgage, much like a regular joint mortgage, the lender assesses both your and your child's financial circumstances when deciding whether and how much to lend.
The key difference is that only your child is named on the property deeds, meaning they alone own the property.
Both you and your child are responsible for the mortgage repayments, though.
What are the benefits of a joint borrower sole proprietor mortgage?
- Your child may be able to borrow a larger amount than if they were applying on their own
- Unlike a guarantor mortgage, a JBSP mortgage won't require you to put up additional security, such as your home or savings, to guarantee the loan
- As you won't own any share of the property, you won't have to pay the second home stamp duty surcharge
JBSP mortgage eligibility
If your child can show that their salary is likely to increase in the future, a lender may be more likely to approve your application.
Lenders also take the age of the parent into account, considering how old you'll be by the end of the mortgage term.
- For expert advice on the best mortgage option for you and your child, call Which? Mortgage Advisers on 0800 197 8461
If you have a mortgage on your own property, you could consider freeing up cash by remortgaging. This would involve arranging a new mortgage with your existing provider or transferring to another lender.
Your mortgage term could be increased to absorb the additional borrowing, your repayments could rise, or both.
A further advance from your existing lender is another form of loan you could get that would be secured on your home.
Before remortgaging it’s important to consider the impact that increased borrowing would have on your own standard of living and your retirement plans.
Find out more: remortgaging to release equity
Inheritance tax implications
If you're going to give money to your child, you'll need to understand the taxation rules around gifting - as parents handing out large lump sums could face a hefty inheritance tax (IHT) bill.
You're allowed to give away up to £3,000 a year without it counting towards IHT - and you can backdate this by a year, too, so in theory a couple could give away £12,000 in a tax year if they haven't gifted anything the previous year. Separate individual gifts of up to £250 are also allowed.
On top of this, it's possible in some cases to draw on unused income to make regular gifts if doing so doesn't affect your standard of living.
Beyond these exclusions, your child might need to pay inheritance tax on any gifts given to them if you die with seven years - though this depends on their cumulative value. To find out more, read our full guide on inheritance tax planning and tax-free gifts.
10 tips for parents helping first-time buyers
If you decide to help your child buy a home, it’s likely you'll want to maintain an element of control, if only to ensure your money isn’t wasted.
Here are 10 tips for parents who want to help their child buy their first property without causing conflict or financial difficulties.
1. Speak to an expert
If you can't afford to buy a house or flat outright, it's likely you'll want to help your child find the best possible mortgage deal.
- Which? Mortgage Advisers looks at every available mortgage from every available lender and will give you and your child impartial advice on the best type of mortgage for their individual circumstances. You can call the team on 0800 197 8461 for free and even set up a group appointment.
2. Update your will accordingly
If you do buy an official share in the property, don’t forget to update your will to reflect what you’d like to happen to it upon your death. Our will-writing guide explains how to validate, store and update your will.
3. Understand your tax liabilities
If you are named on the deeds, you may be liable for certain taxes associated with the property. Read our guides to tax on property and inheritance tax for information on your potential tax liabilities.
4. Be clear about how things will work
You need to make your child aware of whether you are making a gift, a loan (with or without interest) or an investment. It might be an awkward conversation, but it will make things much easier in the long run.
If your child feels embarrassed or guilty about accepting money from you, this could make them less likely to tell you if they’re worried about meeting their monthly repayments. Encourage an open dialogue and make it clear that they can come to you if they get into difficulties.
6. Make it legal
Get a legally binding agreement drawn up by a solicitor. To safeguard a loan or investment, make sure it stipulates the nature of any arrangement.
7. Formalise things with the Land Registry
Even with a legal agreement in place, your child could potentially sell the property without your consent. If you're concerned about this and want to avoid it happening, complete Land Registry form RX1.
8. Discuss home improvements
If you’re buying jointly, make sure you talk about the home improvements you think the property could benefit from – your ideas might be very different from your child’s, so it’s worth having this conversation early on.
9. Be honest with the mortgage lender
It's essential to be honest about your financial circumstances. Don’t exaggerate your income to secure a larger mortgage.
10. Consider future rate rises
Don’t put yourself in a financially risky predicament by overextending yourself, and don’t assume that mortgage interest rates will remain at the same level.
Get personal, expert advice on how you can help your child