Bank of Mum and Dad
Hefty deposits are usually what stands in the way of a first time buyer taking their first steps onto the property ladder. Often first time buyers can afford the monthly repayments, but just don’t have the lump sum for a deposit. That’s why many people are turning to their parents for help: enter the bank of Mum and Dad.
There are clear benefits of getting onto the property ladder, as if a first time buyer can afford a deposit with the support of mum and dad, and some expert mortgage advice from Rettie Financial Services, not only could they own their own home, but they could also reduce their monthly outgoings (according to the aforementioned report private renters spent 31% of their income - including housing support - on rent, while those with mortgage only spent 18% of their income on mortgage repayments).
The bank of Mum and DadMany parents want to help their children buy their first home, and understand the struggle they face with affording the deposit. To give them a head start, parents or family members who can afford to do so, often end up paying all, or part, of the deposit on behalf of their children.
By helping out in this way, it can help to reduce the monthly repayments on a first time buyers mortgage too, as it’ll give access to more mortgage deals and better interest rates.
What is a gifted deposit?A gifted deposit, or a down payment gift, is a sum of money that’s been strictly given to a recipient from a family member to either go towards, or pay for the whole of their deposit.
As the money is gifted, they won’t have to pay it back, unless specifically stated otherwise. Both the buyer, and the family member will have to sign a ‘gifted deposit letter’ or a ‘deed of gift’ to confirm that the money does not need to be repaid. The letter will also state:
- Proof of address
- Proof of identity
- What their relationship is with the applicant
- The amount of money they wish to gift
- That their gift is non-refundable
- That they will hold no legal charge over the property
- Understanding that the gift is an act of kindness and not out of any commercial interest
- The person gifting the money may also be required to provide a bank statement as proof of where the money came from. This is part of a standard money laundering check and nothing to be concerned about.
How much money can be gifted?The person gifting the money can gift as much or as little as they’d like. The only drawback is a potential inheritance tax. If the person who gifted the money passes away within seven years, the recipient will have to pay inheritance tax on the amount given to them.
Will a gifted deposit affect the recipients mortgage?In most cases, no, but it may do if the money needs to be repaid, or if the person gifting the money is not a direct family member.
If the recipient has to pay it back then most lenders will consider it like any other outstanding debt. This means the recipient will have less spare money to meet their monthly payments, which can affect mortgage affordability. However, this will all be taken into consideration at the time of applying for the mortgage.
Gifted deposits can be used in conjunction with Help to Buy schemes and the recipients own savings.
Alternatives to gifting moneyYou may want to help your loved one buy a house, but you might not have the spare cash to do so right now (perhaps you need this money for your retirement fund). However, there are other ways you can help still.
- Another avenue for parents keen to assist their children to get onto the property ladder could be Joint-Borrower Sole Proprietor lending. A form of guarantor mortgage, whereby the parent can supplement the affordability assessment for their child without triggering the prohibitive second-property tax penalties as the child would be named as the sole owner. Ideal for adult-children nearing the end of higher education, apprentices or even young professionals.
- You could help by becoming a mortgage guarantor. As a mortgage guarantor, you’re basically saying that if your loved one, for whatever reason, can’t pay their mortgage anymore, you’ll step in and pay it for them. You can do this by either offsetting your property, or a savings account, against their mortgage.
Similarly, you could consider releasing equity from your house to raise the money, but make sure you seek advice from a qualified professional first.
Speak to a mortgage adviserIf you’ve accepted a gifted deposit, or perhaps you’re the one considering gifting money to help a loved one, feel free to get in touch with our team and we can answer any questions you might have about this process.
At Rettie Financial Services we can provide expert mortgage advice to help get the right solution to meet your needs. With access to over 90 UK mortgage lenders we can help get the right mortgage for your children, and with our expert knowledge of the market we may even be able to help reduce the amount you were planning to gift to them, allowing you retain more of your savings for your own future financial plans.
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Mortgage brokers get paid a fee by the lender upon completion of a mortgage. Most of these brokers will then also charge you a hefty fee on top. This fee typically ranges from £300 to £500 per client, with some brokers charging as much as £1,250.
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Rettie Financial Services Ltd. Registered Office Address: Deuchrie, Dunbar, East Lothian, United Kingdom, EH42 1TG. Registered in Scotland Number: SC711925.
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