Bank of Mum and Dad: A Guide to Helping Your Child Buy a Property

The current cost of living crisis - combined with increasing interest rates, the end of Help to Buy and rising house prices - means that more first-time buyers than ever are turning to the Bank of Mum and Dad in order to take the first step on the property ladder.

Recent figures from Savills revealed that in 2022, gifts and loans from parents totalled £8.8billion, with 46% of first-time buyers receiving financial support from family members to purchase a property. It’s a figure predicted to surge to 61% in 2023.

Historical data highlights the stark differences between buying a house in today’s financial climate compared with years ago, so it should come as no surprise that potential first-time buyers are finding it increasingly difficult to save up for that all-important deposit. If you’re a parent hoping to help your child purchase their first home, White & Brooks has put together a list of options for you to consider. As with any major financial decision, we recommend you talk to an independent financial advisor to ensure you’re making the best choice for both you and your child.

Gift the deposit

One of the best ways you can help your child purchase their first home is to gift them the deposit; this gives them access to better mortgage deals and the opportunity to borrow more, should they need or want to. Most banks will accept a deposit that has been gifted but will usually require written confirmation that it’s a true gift. There are two reasons for this; firstly, should the property ever be repossessed, a mortgage lender will need to know that you don’t have an interest in the home and secondly, for affordability calculations, the lender will need to know that the money isn’t a loan that needs repaying.

It's vital to be aware of potential tax implications if you decide to gift a deposit. You and your child won’t pay any immediate tax on gifted money but, depending on how circumstances evolve, an inheritance tax bill could be due. Everyone is allowed to give away up to £3,000 a year (in total) and this is exempt from inheritance tax.

You can also carry any unused portion over to the next financial year; this means one parent can gift up to £6,000 – or £12,000 for a couple – if they didn’t deposit any large gifts the previous year. However, if you die within seven years of gifting the money, the recipient may need to pay inheritance tax on it. The rules can be complicated, so make sure you do your research.

Loan your child the money

You may not be in a position to simply give your child a large sum of money but you might be able to lend them the amount they need to be able to buy their first home. If this is a route you’re happy to take, you should draw up a loan agreement that should state when it needs to be paid back by and whether any interest is being charged. It would also be wise to include what happens to the debt should anyone involved in the agreement pass away before the loan is repaid.

Whilst it’s quite easy to put this document together, parental loans will need to be declared to the mortgage lender and it could affect how much they’re willing to lend. Some lenders won’t accept a borrowed deposit at all, which will limit the amount of deals your child could access.

Buy a property together

If you don’t have a chunk of money to lend or give to your child, you could consider buying a property together. A joint mortgage would involve both you and your child’s names being added to the mortgage and the deeds to the property. This option means you will both be responsible for the repayments but with two incomes, you may be able to afford a larger loan, a lower mortgage rate and/or a better property.

The downside to this option is if the parents involved already own a property. If this is the case, the additional stamp duty rate of 3% will apply on top of the standard rate. If you gain a second home as a parent and you’re still named on your child’s mortgage when it’s sold, you may also be liable for capital gains tax.

Take out a guarantor mortgage

Another option is being named as the guarantor on your child's mortgage. Essentially this means that you agree to use your savings, or your own home, to cover the debt should they miss payments or fall into financial difficulty.

You can be taken off the mortgage as the named guarantor in the future, as and when your child is able to prove they can take on the full debt themselves. There are, of course, downsides. The obvious one being that you could potentially lose your savings or home if your child doesn’t make the repayments.

Consider opening a Lifetime ISA (LISA)

A Lifetime ISA is a good way for parents and grandparents to assist. This savings account is specifically designed two life’s biggest milestones. Money can only be withdrawn for one of two reasons - a property deposit or retirement. The account holder must be over 18 and under 40 to open a LISA, and a parent or other relative can make regular deposits, as well as the child. A maximum of £4,000 can be saved every year and the government will add a 25% bonus to these savings, up to £1,000 a year. When it comes to buying a property, it can only be up to the value of £450,000 and must be bought with a mortgage. Make sure you read up on all the stipulations around a Lifetime ISA to make sure it’s right for you.

If you’re in a position to help your child make the exciting move of buying their first home and you’re looking for properties for sale in West Sussex, don’t hesitate to give White & Brooks a call.