First-time buyers are increasingly turning to their parents for help buying a property, but research indicates that the Bank of Mum and Dad is running out of cash.
A quarter of all UK property transactions are now at least partly funded by the Bank of Mum and Dad, according to research by Legal & General.
Here, we explore what’s happening and explain your options if you want to help your own child get a foot on the property ladder.
Is the Bank of Mum and Dad going bust?
This year, 316,600 homebuyers – around 27% of the total – will receive help from friends or family, according to Legal & General. This is up from 298,000, or 25%, in 2017.
The financial services company has predicted that these loans will come to £5.7bn in 2018, contributing to property purchases worth £81.7bn.
However, while the number of parents who are lending money is growing, individuals are lending less money. Legal & General claims the average loan size will decrease from £21,600 in 2017 to £18,000 this year.
- Find out more: how parents can help first-time buyers
How can you help your child buy a property?
The most straightforward way you can help is to loan or gift your child a deposit.
It’s well worth taking legal advice before doing this, so that you fully understand the implications of your generosity. This is particularly important if your child is buying with a partner or friend and you want to check what will happen if the relationship breaks down.
Your child will need to be upfront with the mortgage lender about where their deposit is coming from, and you may be subject to money-laundering checks.
Remortgaging to release cash
If you’re keen to help out with a deposit but don’t have enough cash in the bank, you could consider remortgaging.
When remortgaging in order to borrow more money, you’ll be subject to many of the same affordability checks and criteria that you were when you first took out the mortgage.
For this reason, it’s worth getting your finances and credit score in order before applying – and, as always, taking advice from an independent mortgage broker to ensure you’re getting the best deal.
‘Family assist’ mortgages
There are increasing numbers of mortgage options for parents who don’t have cash to contribute to a deposit upfront. These are collectively known as ‘family assist’ mortgages, and they sometimes enable your child to borrow 100% of the property price.
We’ve explained each type currently available below, but would strongly advise talking to a whole-of-market broker before acting.
Here, you would act as a guarantor on your child’s mortgage. This means that you’d be responsible for their monthly repayments if they couldn’t pay.
In the past, the terms of guarantor mortgages have meant that your own home could be at risk if your child stopped paying their mortgage, but there are now some products that limit your liability.
Family offset mortgages
This involves you putting your savings in an account linked to your child’s mortgage. The balance is deducted from their total mortgage sum before interest payments are calculated, meaning they pay less each month.
You may have to lock your money away until 75-80% of the property price has been paid off, which takes a long time – and you won’t earn interest on your savings during this period.
Family deposit mortgages
Again, your savings are kept in an account linked to your child’s mortgage – but here, the cash is held for a fixed period of time.
If your child defaults on their mortgage, you’ll lose your savings, but on the plus side you will earn interest on the balance.
Family link mortgages
Launched by the Post Office in April, this ‘100% mortgage’ actually combines a 90% mortgage with a 10% loan, which is secured against the buyer’s parent’s home.
The downside is that you must be mortgage-free to qualify. Also, the mortgage’s five-year fixed interest rate of 4.99% is high, so it’s worth taking advice on whether there are more cost-effective options for you and your child.
The final option to mention is a joint mortgage. This can be helpful as your income, as well as your child’s, is taken into account in the affordability assessment.
A regular joint mortgage would mean that both your name and your child’s were on the property deeds, as well as the mortgage.
However, products such as the ‘First Start’ joint mortgage, which enables you to remain unnamed on the property deeds, are now available. This can help you avoid having to pay the stamp duty surcharge that is applied to people buying a second property.