As the cost of housing increases and lenders tighten their requirements for mortgage applications to be accepted, more and more parents are helping their children become first-time homeowners by giving them money for a deposit. This is sometimes referred to as 'the bank of mum and dad.'

A gifted deposit is the most popular option, however, there are other options to consider including offset, guarantor and family deposit mortgages.

Gifted deposit

To assist their children in getting a foothold on the property ladder, parents are able to offer financial assistance by providing money for a house deposit. This is known as a gifted deposit, which is a sum of money which the donor (typically a parent or close family) provides and the customer is not required to pay. The donor also has no legal right to the customer's property.

Most mortgage lenders have criteria around gifted deposits and some stipulate who is permitted to ‘gift’. Family members are usually fine, but distant relatives or friends aren't always accepted. Most lenders require written confirmation that the money is a gift and not a loan and they are happy to have no rights to the property.

Property solicitors and conveyancers are mandated to complete due diligence in relation to money laundering for all property transactions. These can incur additional fees and documentation.

Family deposit mortgage

The family deposit mortgage is a family help mortgage that can support buyers by using security provided by their family, without the need for a gift. This can be savings or equity in their home.

One option for a family deposit mortgage is when your relative uses these savings as security. The family members are required to deposit their savings into a lender's savings account, they are not permitted to access those funds typically for around three to five years. However, if all payments on the mortgage are made and then not only will they get back their initial savings amount but also receive interest in addition! Nonetheless, should any mortgage repayments be missed during this time frame - the duration of savings may extend longer than anticipated.

The second option for a family deposit mortgage works by giving the buyer a per cent loan-to-value mortgage secured against the property they're buying plus an interest-free five-year loan secured on a close relative or parent's home.

Guarantor mortgages involve another person agreeing to take full responsibility for the mortgage if the borrower is unable to make repayments. This can be a parent or other family member, which makes this mortgage option especially attractive. Finally, family deposit mortgages allow parents to contribute part of the deposit amount for the loan, providing a boost to their child's borrowing power and credibility with lenders.

While these mortgages are useful tools for helping aspiring first-time buyers, it's important to remember that the decision should be taken seriously. Parents should make sure they understand the risks and potential costs involved, as well as how this financial commitment will affect their own retirement plans.

Mortgage repayments

If you don't pay your mortgage repayments your guarantor on the mortgage will be responsible for making the payment. It can also take some time for lenders to approve such mortgages, so it's best to start planning early. Ultimately, parents should strive to ensure that their children are well-equipped for long-term success in the property market.

Which family member can give a gifted house deposit?

Lenders usually prefer for the gifted deposit to come from a close family member, so asking your parents if possible, will be the best option for you. A gifted deposit letter or template will need to be filled out by the gift giver and some photo ID will be requested also, as well as proof of the deposit being held in the bank account. However, some lenders will accept other family members to provide you with a deposit.

How do offset mortgages work?

This type of mortgage links your savings account to your mortgage, they have to be with the same bank so the activity in your savings account can be monitored by the provider. The amount you have saved in your account is offset against your mortgage balance, which reduces the amount of interest you pay.

Most lenders will give you the choice of either reducing your monthly payments over the same loan duration or keeping the same level of mortgage payments and paying off your loan over a shorter duration. When you offset your savings, you won’t be able to earn interest on them.

What if I can't get a gifted cash deposit?

If you aren't able to get the total amount you need for your deposit as a gifted deposit then there are other options for you such as a family deposit mortgage, this allows parents to use the equity in their home to provide you with a deposit to purchase your home.

Offset mortgages are also a great option if you have a significant amount of money in your savings account, the more the better. The more you have in your savings the more you will have to offset against your mortgage balance.

A guarantor mortgage will give your parents the responsibility of paying your mortgage repayments if you were to miss any. This is a safe option for the lender, however, this may put some of your parents' assets at risk if you were to miss multiple payments.

Overview

The 'bank of mum and dad' is a great way to help first-time buyers get onto the property ladder, but only if it's undertaken with care and caution. With the right planning and research, parents can make sure that their children have the best possible chance of making a successful purchase.

To ensure you are getting the right mortgage contact us Monday to Friday at 0151 662 0188 or email any time at [email protected].