How to help your child buy a home
With high prices and high deposits, it’s no wonder that many young people turn to the bank of mum and dad when trying to buy their first home.
Here’s a look at how you can help your child climb onto that first, all-important rung of the property ladder.
With high prices and high deposits, it’s no wonder that many young people turn to the bank of mum and dad when trying to buy their first home.
Here’s a look at how you can help your child climb onto that first, all-important rung of the property ladder.
How can the bank of mum and dad help buy a home?
These days, it’s much more common for the bank of mum and dad to play a role in buying a first home. Here are the main ways they can help:
- A gift – this could be the deposit (or part of it)
- A loan – rather than paying the deposit as a gift, you could agree to loan your child and have them repay it over time
- Act as a guarantor – this could either be for the mortgage or a loan to secure the money for a deposit
- A joint mortgage – offering to be the other person(s) listed on the mortgage
Can you gift your child money to contribute towards a house deposit?
One of the easiest and most straightforward ways to help your child buy their first home is to give them the money for a deposit as a gift.
Although a good-sized deposit can help them find a cheaper mortgage deal, even 10% of the property value could get them a decent choice of mortgages.
You’ll most likely need to sign a statement for the mortgage provider, confirming that the money is a genuine gift and not a loan that needs to be repaid. You may also need to declare that you have no legal interest in the property.
How can you protect a house deposit gift?
If you’d like to protect your house deposit gift and specify that it is for your child only, and not anyone else they’re buying the property with, there is something you can do. You can gift the money under a ‘declaration of trust’ or a ‘deed of trust’. Without this, if your child was to break up with the partner they’re buying the house with, they’d both be entitled to the money you’re gifting.
If you’d like to set up a declaration or deed of trust, you should talk to the solicitor who’s handling the property purchase. They’ll be able to set up the deed and answer any questions you may have.
What are the tax implications of gifting money?
Your children won’t need to pay tax on the money you gift them right away, if at all. The bank of mum and dad also won’t need to pay any tax. The only time tax could be due is in the form of inheritance tax. You’re allowed to give up to £3,000 a year away, which is exempt from inheritance tax. This is per parent, which means a total of £6,000 could be given away in one year from both parents. Parents can also carry over any unused inheritance tax allowance from the previous year, which could allow two parents to gift a maximum of £12,000, with no inheritance tax due.
Inheritance tax comes into play when you gift your child more than £12,000. You can gift them as much money as you like, but if you die within seven years of gifting the money, your child may need to pay inheritance tax.
Can you loan your child money for a house?
If you don’t want to gift the money, you could lend the deposit to your child instead. There are two ways you could do this:
Set up a loan and charge them interest each month - you’d need to organise a repayment schedule. The arrangement can be formalised with a ‘promissory note’ – essentially a written promise for your child to pay the money back to you - which can be drawn up by a property solicitor. You’ll also need to let the mortgage lender know, as the loan could affect your child’s mortgage repayments. Be aware that a loan from you could limit the amount of mortgages your child can apply for.
Set up a ‘deed of trust’ – a formal agreement which ensures you get the money you’ve loaned your daughter or son back if the property is sold.
What are the pros and cons of giving or lending your child money for a house deposit?
Like with any borrowing or gifting of money, there are advantages and disadvantages. Here are the pros and cons of buying a house with the help of the bank of mum and dad:
Pros
- Help getting on the property ladder – getting on the property ladder is much harder than it used to be, so the bank of mum and dad is often a boost for their children looking to leave home.
- Afford a better home – similarly, it can also help your child get a better home than they’d otherwise be able to afford. Moving home can be very expensive, so if you can skip a rung or two on the property ladder early, you’ll save even more money in the future.
- Cheaper mortgage – if mum and dad are gifting or lending money, you won’t need to borrow as much on a mortgage. This improves your loan-to-value ratio and can unlock cheaper mortgage rates and make your monthly repayments cheaper.
- The tax benefits – parents can gift their money to their children completely tax free. So long as they live for the seven years afterwards, there will be no inheritance tax to pay.
Cons
- Mum and dad are paying for it – bit of an obvious one, but if the bank of mum and dad are paying for the deposit, that’s money they won’t have for themselves. If they then need that money later, they can’t get it back.
- Money can complicate relationships – whether it’s between the people buying the house, the child and their parents, the child and their siblings, lending or gifting money can often come with its issues. Before you go ahead with this, it’s important that everyone’s comfortable with the money being gifted or borrowed.
- Borrowing from mum and dad can complicate a mortgage application – if you’re borrowing from your parents, rather than receiving a gift, your mortgage lender will take this into account, because you’ll be repaying that loan on top of your mortgage. This may restrict the mortgage options available to you.
- Extra paperwork – if you’re receiving a gift or loan from your parents, you’ll need to complete additional processes or paperwork. This could be ‘proof of funds’ documentation, to identify where the gift comes from (and isn’t illegal), or working with your mortgage lender to figure out how you’ll repay your mortgage and loan from your parents.
What are the alternatives to giving your child a lump sum of money?
If you don’t have enough cash available to give or lend a lump sum of money, there are other options:
Equity release
The most popular type of equity release is a lifetime mortgage. It allows you to take a portion of the equity in your home and use it as a tax-free lump sum. You won’t have to make repayments, but interest will be added to the lump sum taken out and must be repaid if your house is sold.
Offset mortgage
A family offset mortgage allows your own savings to be offset against your child’s mortgage. This reduces the amount of interest they pay. The downside is that if you need to dip into your savings, your child’s monthly payments could go up.
Joint mortgage
A joint family mortgage takes into account both your income and that of your child’s. If you buy a property together, you’ll both be liable for mortgage repayments. However, if you already own a home, you could have to pay a second home stamp duty surcharge.
A way around this is a joint borrower sole proprietor mortgage (JBSP). Although you’d be jointly responsible for mortgage repayments, your child would have full ownership of the property, so you wouldn’t need to pay a second home surcharge.
100% mortgage
Essentially, this is a parent guarantee mortgage. Your child can borrow the full 100% so no deposit is needed. However, as their parent you must guarantee to take over the repayments if they can’t pay. Your home could be at risk as this is usually used as security for the mortgage.
Lifetime ISAs
Lifetime ISAs (LISAs) can be used to save towards buying your first home. Saving into a LISA offers a government bonus scheme, which provides a 25% bonus on savings made, up to £1,000 a year. You can then use your savings, along with the government bonus, to buy your first home.
What is the process of buying a house with your parents’ money?
If you’re buying a house with your parents’ money, here are the steps you’ll need to take:
- Tell your solicitor – this needs to be done as soon as possible. You’ll need to explain how much is being gifted to you, as this will affect the mortgage products available to you and the overall process.
- Provide evidence – this normally includes a letter from your parents, declaring that they are happy to provide the gift. It’ll need to include the specific amount being gifted, along with any conditions the money is being gifted or borrowed under. Your parents will also need to provide ‘proof of funds’ to prove where the money has (legally) come from. This will involve providing bank statements and/or other legal documents.
- Any additional legalities – this could involve drawing up a deed of trust, to protect or determine what happens to any of the gifted or borrowed money in future, should the house be sold or the couple break up.
Should you talk to an expert before you help your child buy a home?
Whatever step you take, it’s a big financial commitment and there are risks involved. Before you make any major decisions, it’s sensible to get advice from an expert. You can consult an independent financial adviser, and our partners, London & Country Mortgages can give you fee-free mortgage advice.
Once you’re ready to compare mortgages, use our quick and easy comparison tool to find out what mortgage deals are available.
The Editorial Team - Compare the Market
Experts in personal finance, insurance and utilities
Compare the Market’s Editorial Team is made up of industry experts with decades of experience in personal finance, insurance and utilities. Each of our authors has an area of expertise, where they can share their extensive experience to help you get a better deal, by finding the right product and saving money.