The ‘bank of mum and dad mortgage’

The ‘bank of mum and dad’ is becoming a well-established term for parents subsidising their adult offspring.

But are you ready for the ‘bank of mum and dad mortgage’?

Helping your children take their first steps on the property ladder isn’t new.

But as research shows that in 2024 173,500 first time buyers had £9.6bn worth of help from their parents, what are the implications of being your child’s mortgage provider?

Here we take a look at how parents and grandparents can help their descendants buy a home – and the implications for all parties involved.

Why the bank of mum and dad is more important than ever

The rising cost of property, higher mortgage rates and a more stringent mortgage market have combined to make it increasingly challenging for young people to buy their first home.

With average house prices at almost £300,000 and minimum deposit requirements at between 5% and 10%, first time buyers need to scrape together at least £15,000 before they can even think of getting on the property ladder.

Many lenders ask for deposits of between 15% and 20% of a property’s value. This leaves buyers looking at the thick end of up to £60,000 as a deposit.

And all this is before lenders look at ongoing affordability criteria…

Faced with this kind of financial conundrum, it’s unsurprising that young people are turning to their parents for help.

So if you want to help your child or your grandchild out with their first property, what do you need to watch out for?

Gifts vs loans vs co-investment

A key decision you will have to make as ‘the bank of mum and dad’ is on what terms you will give your assistance.

There are three main ways of helping out financially:

• Via a gift
• Via a loan
• Via co-investment

Gifting a house deposit to your child

Gifting can be a good way to help out family as well as cut down on potential inheritance tax liabilities after you’re no longer around.

We deal with the issue in-depth in another guide but basically you could gift a substantial amount to your child (or grandchild) and, providing you live for a further seven years, no inheritance tax would be paid on that amount.

If you were to die before that seven years is up then inheritance tax could be charged on any amount over the £325,000 allowance (known as the nil rate band) on a sliding scale as follows:

Instead of a one-off boost to your family member’s property purchase, you could help them with regular payments.

Known as ‘gifts from income’, these must be amounts that do not affect your standard of living and that are made on a regular basis e.g. every month or every year.

Such gifts from income will not count towards your estate for inheritance tax calculations, providing that you keep a record of them via a form available from HMRC – the IHT 403 form.

Lending money to help children buy property

If you’d prefer to lending your child or grandchild money for a house purchase, an appropriate form of loan agreement is a must.

Clear evidence of the loan is important to ensure that the amount you are lending is protected from third party claims.

Any loan you make can be secured against the property by way of a second charge (the mortgage lender’s charge will take priority).

Normally, family loans are documented as interest free and repayable on demand, since this keeps the status of the loan simple from a tax perspective.

However, if you take this approach, you should be aware that the debt due to you counts as an asset of your estate for inheritance tax purposes. As a result, if you die before the loan is repaid, family members may end up effectively paying the debt twice.

You may wish to consider waiving the debt further down the line, although any such waiver has to be done by way of a deed.

Certain lenders in the market have the ability to factor in this loan agreement into the mortgage proposition but it should be noted that any repayments in the loan, will be factored into their affordability for a mortgage.

Co-investing with your child: what to know

The final option is investing in a property with your family member.

This could give you an element of control in terms of where your money goes and gives you a prospect of some return on your investment.

However, you should be aware of the potential for tax downsides, including a stamp duty surcharge that will apply to the purchase price if you already own a property.

You will also have to pay capital gains tax on any rise in the value of your share in the property if the property is sold in your lifetime.

An interesting proposition to overcome these tax issues is through a joint borrower – sole proprietor option, where parents (or relatives) can enter into a mortgage agreement but without being an owner of the property. This situation is particularly useful where there are shortfalls in affordability. This proposition is being offered increasingly by lenders across the market.

Using trust planning to help children buy a home

An alternative option for parents to help their offspring with property purchases is trust planning.

This is where parents set up and gift into a discretionary trust for the potential benefit of their adult children and future generations.

Although the parents must be excluded from receiving any benefit from the trust assets themselves, they can act as the trustees to decide when and how best to apply the trust funds for the benefit of their children.

Such a structure can help with the gifting process outlined above and can have added security benefits.

However, establishing and maintaining a trust requires specialist financial and legal advice so you will need to consult experts before moving ahead.

Protecting your gift from relationship breakdowns

No-one wants to think about splitting up when they buy their first house. However, if you gift money to your child for a property then that money can be subject to claims by third parties.

This means that if your child moves in with a partner or marries and that relationship breaks down, their partner could make a claim for a share of the money you’ve given your child.

One way to avoid this is to have a declaration of trust created through a conveyancer. This will in essence “ring-fence” the deposit so that on sale, this will be returned to the person providing the deposit in the event of relationship breakdown.

While it’s not the most romantic thing to do, it is a practical measure to protect financial interests.

How mortgage lenders view parental help

While most mortgage lenders are okay with parents financially supporting their offspring with property purchases, there are certain areas where a gifted deposit is not allowed by a lender.

This is often the case with high Loan to Value products where the lender insists as a trade-off for the high loan to value offering, that the deposit must come from the applicant’s own funds.

These products only make up a small proportion of the market, however.

Key takeaways – is a bank of mum and dad mortgage right for you?

Helping children or grandchildren with the financial side of owning a property is becoming more common and, in some cases, almost essential.

However, while your intentions may be laudable, it pays dividends to think carefully and take expert advice before turning those intentions into action.

Speak to us to today to find out how we can help make your child’s property dream a reality – without giving you a headache.

Disclaimer: This article is for informational purposes only and does not constitute financial, tax, or legal advice. Tax treatment depends on individual circumstances and may change. Always seek professional advice before making financial decisions.