According to a recent study by Legal & General, over half of first-time buyers under 35 received a financial gift from the ‘Bank of Mum and Dad’ (BoMaD).
In this article, Conveyancing Partner Michelle Petersen details the different ways in which parents can help their child buy their first home.
What is the bank of mum and dad?
The Bank of Mum and Dad refers to parents gifting or loaning their children finances to help them get onto the property ladder. This has become popular for first-time buyers who can't afford a deposit without help.
What is a BoMaD Loan Agreement?
Parents may wish for their monies to be treated as a loan rather than a gift. In this case, the parties should enter into a Loan Agreement.
This will set out the terms of the loan, such as repayment due and whether there is to be any interest payable. It is important to properly document such a loan in this way, as HMRC can be suspicious of loans between parent and child.
What is a joint mortgage and can I get one with a parent?
In short, yes. If the parent or parents are still employed, a joint mortgage is an option. This would mean that both the parent(s) and child would be named on the mortgage and property deeds and would be responsible for the mortgage payments.
What are the pros and cons of a joint mortgage?
A joint mortgage can work well as it allows parents to help their child with payments and could potentially mean that you can borrow a larger sum from a lender than previously available.
On the flip side, a joint mortgage can have tax implications for the parent as they will need to pay second property stamp duty rates and may have to pay capital gains tax when the property is sold.
Can my parents guarantee my mortgage?
Yes, parents can act as guarantor if they have a good credit history and are financially stable. A guarantor mortgage potentially enables someone to get a mortgage even if they have a bad credit score, or only have a small deposit. This is done by nominating a guarantor to cover the mortgage repayments.
What are the pros and cons of a guarantor mortgage?
The pros are almost self-explanatory; in that someone who may not have been able to get a mortgage previously, due to a bad credit score or because they don't have a deposit, now can.
Furthermore, having someone as a guarantor could mean that you could borrow more; as the lender has peace of mind in terms of repayments.
As for the cons, the main disadvantage of a guarantor mortgage is that if the guarantor cannot pay the repayments then they could potentially lose their own home and damage their credit score.
Whether you are a first-time buyer or a guarantor, it is important to seek legal advice before committing to a guarantor mortgage. Get in touch here.
What is a family springboard mortgage?
A family springboard mortgage, sometimes known as a family deposit scheme, is the process where a first-time buyer with a 5% deposit gets helped by their parents or other family member(s), who provides an extra 10% of the purchase price.
A springboard mortgage is often used when a first-time buyer can't get approval for a mortgage without parental support. The terms of a family springboard mortgage vary between lender.
5% deposits are now available after the deposit scheme was launched in April 2021. Please read our full guide to the scheme here to learn more.
What are the pros and cons of a family springboard mortgage?
One of the pros of a family springboard mortgage is the extra 10% deducted from the purchase price, which would otherwise be unreachable for the homebuyer. In addition to this, the security of depositing the funds into the lender's account will be an appealing factor for parents/family.
The issue with springboard mortgages is the consequences of repayments not being made on time, if a payment has been missed the parent's money can be held until repayments are up to date.
Depending on the lender, there can be even more serious ramifications of missing multiple repayments; so, it's important to carefully consider your options before entering into anything.
If you are considering a family springboard mortgage and want to make sure you are well informed before entering into anything, please get in touch with one of our friendly property solicitors.
Can my parents give me money for a deposit?
Yes, parents or other family members can gift homebuyers a deposit. A parents' gifted deposit can be money towards or the full amount of a deposit and does not require repayment, it is simply a 'gift' not a loan. A gifted deposit doesn't give the parent/family member any stake in the property.
Do I need to prove where my deposit came from?
Yes. Generally, the lender will need proof that the money is a gift rather than a loan; this can be proved by a signed document outlining that this is the case.
This document should include a statement that the deposit is gifted, the terms that the gift is to not be repaid and does not give the parents any right to the property, proof that the gift is legitimate and comes from legitimate funds (e.g. bank statements) and the proof that the parents are financially stable and able to provide the gift.
For further advice on this, please refer to your lender who can give you a more detailed outline on what needs to be included in the document.
Is a gifted deposit letter legally binding?
In short, yes. A gifted deposit letter is legally binding for the party who gave the gift (e.g. parent), meaning that they cannot make a claim for repayment as they have formally agreed that the deposit is a gift.
Do you pay tax on gifted deposits?
Capital Gains Tax (CGT) generally only applies if the value of the asset is increased on disposal. Cash, by definition, does not increase, so a gift of cash from mum and dad has no CGT implications at all.
If the person(s) that gifted the deposit passes away within 7 years, the recipient would have to pay inheritance tax on the gifted money.
How can I protect the bank of mum and dad?
If nothing is done to protect the bank of mum and dad, there is no guarantee that finances will not be treated as a shared asset in divorce and split with the child’s partner.
However, there are ways to protect the bank of mum and dad; which we detail in a follow up article. You can read our bank of mum and dad protection article here.
Specialist First Time Buyer Solicitors
If you have any queries regarding the bank of mum and dad, or have any other related questions, please feel free to contact us on 01202 499255.
We offer all new clients a free initial chat with one of our bright, friendly lawyers over the phone or by video call.
First-time buyer guidance
We have written several other articles for first-time buyers, these are listed below:
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