Can My Parents Help Me with My First Mortgage? Options & Expert Advice
Getting onto the property ladder can be challenging, especially with rising house prices and strict mortgage affordability checks.
If you’re finding it difficult to save for a deposit or qualify for a mortgage on your own, you might be wondering if your parents can help.
The good news is that there are several ways parents can assist with a first mortgage, from gifting a deposit to acting as a guarantor or going on the mortgage on a joint borrower / sole proprietor basis.
Ways Parents Can Help with a Mortgage
Gifted Deposit
One of the most common ways parents helps is by gifting a deposit. Mortgage lenders typically require a deposit of at least 5-10%, but saving this amount can be difficult. A gifted deposit can boost your mortgage affordability and may even help you secure a lower interest rate.
- Most lenders will require a signed letter confirming the money is a gift, not a loan. Your parents would likely need to confirm that they will not reside in the property or have a financial interest in it, depending on the lender’s criteria.
- There are potential inheritance tax implications if your parents pass away within seven years of gifting the money. This may lead to an IHT bill. You should speak with a tax adviser for more information about this.
- If you are buying with a partner, your parents may want to protect the gift in case of future separation. This is not always allowable with every lender so it will depend on their criteria. You should also take legal advice around this.
Acting as a Guarantor
If you have a low income or a poor credit history, your parents may be able to act as a guarantor for your mortgage with some lenders, although not so common now. This means they agree to cover the repayments if you are unable to.
- Your parents’ assets (including their home) may be at risk if you default on repayments depending on which properties are charged.
- Guarantor mortgages can be harder to obtain, and not all lenders offer them so taking financial advice from a mortgage adviser is recommended.
- Parents should seek independent financial advice before committing. It is also recommended to take independent legal advice to fully understand your obligations.
Joint Borrower Sole Proprietor Mortgage
A Joint Borrower Sole Proprietor (JBSP) mortgage allows your parents to help with affordability without being named on the property deeds. Their income is considered when applying, but they don’t own the home.
- Your parents won’t have ownership rights, meaning no additional stamp duty charges for their contribution, only assessed on the circumstances of the homeowners themselves.
- Both parties are responsible for repayments, so your parents’ borrowing capacity may be affected if they wish to take out other mortgages in the future. Their credit files will also be impacted if payments are not made.
- Some lenders impose age restrictions on JBSP mortgages which may lead to shorter terms and higher monthly payments.
Family Offset Mortgage
A family offset mortgage lets your parents place savings in a linked account, which reduces the amount of interest you pay on your mortgage.
- Your parents retain access to their savings but won’t earn interest on them.
- If they withdraw money, your mortgage repayments may increase.
- Not all lenders offer family offset mortgages, so specialist advice is recommended.
Equity Release for a Deposit
If your parents are homeowners but lack liquid savings, they may be able to release equity from their property to help fund your deposit.
- Equity release reduces the inheritance they can leave behind.
- Some plans require monthly interest payments, while others roll up the interest.
- Professional advice is essential, as equity release can impact their long-term financial security and is not to be entered lightly as it erodes the equity within their property.
Find out Your Options
The Rise of the ‘Bank of Mum and Dad’
Over the past decade, parental assistance for first-time buyers has become so common that it’s often referred to as the “Bank of Mum and Dad.” Many first-time buyers in the UK now receive financial help from family – whether through a gifted deposit, acting as guarantors, or joint mortgage arrangements. This trend highlights how challenging it can be to get on the property ladder independently. If your parents are helping, treat it like a formal financial arrangement: discuss expectations openly and consider drawing up legal agreements (such as a deed of trust for a gifted deposit). By approaching the Bank of Mum and Dad with clear communication and proper advice, you can benefit from family support while avoiding misunderstandings down the line.
Risks and Considerations for Parents
While it’s great to have parental support, there are some important financial and legal implications to be aware of:
- Impact on Their Finances: If parents act as a guarantor or borrow against their home, they may face financial strain in the future. Their credit files are also at risk if a payment was missed that they were unaware of.
- Inheritance Tax (IHT): Gifts above the annual exemption could be subject to inheritance tax if the giver passes away within seven years. This would need to be taken into consideration and professional tax advice is recommended.
- Relationship Strains: Mixing family and finances can sometimes lead to disagreements, especially if expectations aren’t clearly defined.
Before offering financial help, parents should assess their own financial situation, retirement plans, and any tax implications rather than enter the transaction lightly believing they are doing the best by their children.
How to Get Started
If you’re considering parental support for your mortgage, here’s how to move forward:
- Assess Your Affordability: Work out how much you can borrow and what deposit you need. You may want to see what you can borrow on your own before involving your parents.
- Speak to a Mortgage Broker: A specialist like Kerr & Watson can help you find the best mortgage options and lenders that accept parental support. Your adviser can talk with your parents, so they understand the risks and obligations, so an informed decision is made.
- Consider Legal Protection: If your parents are gifting money, consider drafting a formal agreement to protect all parties involved. Always use a qualified professional for this.
- Apply for a Mortgage: Once you’ve agreed on an approach, your mortgage adviser can apply for a mortgage when they have all the necessary documents and details. They would guide you through the process.
Conclusion
Parents can play an important role in helping you secure your first home, whether by gifting a deposit, acting as a guarantor with the few lenders that offer this, or exploring alternative mortgage options such as joint borrower / sole proprietor.
However, it’s essential to consider the financial and legal implications before making any decisions.
If you’re looking for expert guidance, Kerr & Watson can help you with the mortgage process and find the best solution for your circumstances. Contact us today to explore your options.
