The “Bank of Mum and Dad” (Bomad) has unofficially become the UK’s 9th biggest mortgage lender, with parents gifting or lending more than £6.5 billion¹ this year to help their loved ones get onto the property ladder. That’s a massive 30% increase¹ in the last year!
Hardly a surprising statistic when you consider the average price of a house in England is £234,000² (in London it is £475,000), yet the average annual income sits at £26,468. That’s 8x average income³!
Clearly, help from Bomad is increasingly becoming the lender not of choice but of necessity for many young adults. So what are the best ways you, as a parent, can help your children get a foothold on the housing ladder?
We all need to meet three basic criteria in order for a mortgage company to even consider lending to us: Deposit, affordability, and credit rating. Young borrowers often fall down on at least one…and that’s where you come in.
1. Deposit: Paying your child’s deposit
Gifting money towards the deposit
If you are feeling generous and have enough to do so, you could simply gift your children some or all of the deposit that they need to qualify for a mortgage. The mortgage lender will require written confirmation that:
- You are not expecting this money to be repaid and,
- You will not have any ownership rights over the home.
Gifting the money is also a good way to reduce your children’s inheritance tax bill when you die. Provided you have lived for 7 or more years since giving your generous gift, the money is excluded from the value of your estate.
However many of us don’t have a spare £20,000+ just sitting around that we don’t need – the average first-time buyer requires a deposit of about £32,000⁴. So what else can you do?
What about loaning the money directly to your children?
Banks are offering paltry returns for money sat on deposit. Instead of gifting the money to help your children pay their deposit, you could lend it to them at a negotiated interest rate that would suit you both:
- You achieve a higher rate of return than the banks are offering;
- Your children pay you a lower rate than the mortgage lender’s rate on the amount that you loan them.
Your children will, of course, still need a mortgage for the difference and have to show their mortgage lender that they can afford their mortgage repayments. You yourself may also be liable to tax on any interest that you receive.
Or loaning the money to your children via the mortgage lender?
To make the options for Bomad-supported first-time buyers more appealing, several lenders offer mortgages that require you (the parent) to deposit money with the bank for a set number of years to act as security.
You get your money back at the end of the set time (e.g. 3 years), as long as your child has paid all their repayments.
If you don’t have the money sitting on deposit, what about using the equity in your home?
If you have benefited from a rising housing market, you could consider using some of the equity within your own property to help your children buy theirs.
There are various ways you can do this, from equity release to offset mortgages. Before you do anything, it is advisable to seek professional advice so that you have all the facts to choose the best option for you and your individual circumstances. You will also need to arrange a repayment method and may need to check your protection requirements.
2. Affordability: Basing your child’s mortgage on your income
The amount a mortgage provider will lend you is typically calculated based on your income and your affordability i.e. how much money you have left over after your fixed outgoings.
There are many factors that can influence affordability: loan repayments, nursery or school fees, and car payments for example. They are all costs that reduce your affordability and the amount that you can borrow. They are also costs that your children are likely to have…and you are less likely to have.
Generally speaking, the older you get the higher your affordability rating. Your children become less reliant on you financially, your mortgage gets smaller and smaller if not completely repaid, and there is invariably an acceptable amount of cash left over at the end of each month once you have paid all your bills and expenses.
For your children it’s the opposite! More often than not, they have little, if any, left over cash at the end of the month!
You can use your affordability strength in one of two ways:
- By agreeing to be a guarantor on your child’s mortgage or,
- By entering into a joint mortgage with your child.
In both cases, the mortgage lender takes into account your affordability which potentially allows your child to borrow more. You must remember though that your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it!
Beware of being guarantor or joint mortgage holder with your child
Whilst being a guarantor of your child’s mortgage or entering into a joint mortgage with them are certainly two viable options, they both have their downsides.
Higher monthly repayments
Not only do nearly all mortgages now need to be repayment mortgages, lenders want to know that the mortgage will remain affordable when the oldest person goes into retirement.
These restrictions alone can lead to shorter term mortgages (18-20 years compared to the typical 25+ years) which require higher monthly repayments.
Your name on the deeds
If you are named on the mortgage, lenders may also want you to be named on the property’s ownership deeds.
If this is the case, your child’s property will be deemed a second property owned by you and therefore liable for the higher rates of stamp duty at the point of purchase.
What’s more, if you die with your name still on the deeds, the value of your share of your child’s property will be added to the value of your own home for inheritance tax purposes. It could then be liable for inheritance tax.
The good news is that there are a handful of lenders who will set up a mortgage on a “joint borrower-sole proprietor” basis. This means that whilst the parent’s credit rating and income are taken into account by the mortgage provider, the child is deemed the only owner of the property, thus avoiding the stamp duty and inheritance tax issue.
3. Credit Rating: Sharing your credit rating with your children
A poor credit rating doesn’t necessarily mean a history of bad debt. It could just be because a young borrower has never held credit before; they simply have no credit footprint at all.
If you opt for being a guarantor or taking a joint mortgage with your child, your credit score will be taken into account as well as your child’s.
It will be a valuable addition that could be the difference between your child getting a mortgage and not, plus you get undisputable nagging rights on making sure that your child improves their credit use!
4. Your Options: Knowing what all your options are
Mortgage lenders know that the “Bank of Mum and Dad” is how the next generation is going to be able to afford to buy their first home, and they’re tapping into this market with more and more ingenious ways of lending.
One provider has even just launched a hybrid between a buy-to-let and a guarantor mortgage for those who have children at university and would rather start their child off early on the property ladder than pay rent for the duration of the course.
For sure, mortgages that do involve the “Bank of Mum and Dad” are more complicated than the norm but, with specialist advice that considers all the options and risks, helping your children get onto the property ladder doesn’t have to be a pipe dream for you or them.
Which do you think is the best way to help your children get a foothold on the property ladder? Let us know by adding a comment below.