What is a Bank of Mum and Dad scheme and mortgage?
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As per data from Savills, approximately 170,000 first time buyers benefited from family assistance to secure their mortgages in 2022, representing nearly 46% of all first-time buyers with mortgages. Projections for 2023 indicate a significant surge to 61%, a rate not observed since the period preceding the introduction of the Help to Buy scheme.
According to Rostrum, first-time buyers receiving financial aid from their families usually possess deposits that are two and half times larger, while their loan amounts are 30% smaller compared to those purchasing without such assistance.
All of this data highlights that a substantial portion of first time buyers are relying on family support and the Bank of Mum and Dad to secure their mortgages.
In this article, we will cover what the Bank of Mum and Dad is, what mortgage alternatives are available, if the money is taxable, what the process of buying is and how parents can fund their children's first purchase.
What does Bank of Mum and Dad mean?
The Bank of Mum and Dad, or BoMaD is where grandparents and parents aid younger family members with large purchases like houses and cars. It is commonly known as one of the cheapest ways for first time buyers to get a loan to purchase a property or deposit to assist a mortgage application.
How can parents help their children buy a home?
Parents are able to buy a first home in many different ways like a financial gift or gifted deposit, a loan, taking out a retirement interest-only mortgage, taking out a guarantor mortgage, a family offset mortgage, getting a joint mortgage and taking out a joint borrower, sole proprietor mortgage.
Can you gift your child money to buy a home?
It’s not uncommon for parents to give their children cash to make up the difference in their deposit and boost their borrowing power so they can access a cheaper mortgage deal and borrow more.
In the UK, most banks will accept deposits that have been partly or entirely gifted but they will ask for written confirmation from you stating it is a true gift.
This is because in order for the banks to do affordability calculations, they will want to gauge whether the money isn’t a loan that requires regular payments. They will also want to know if the worst came to worst and they had to repossess the house, you don’t have an interest in the property.
What is a Bank of Mum and Dad scheme?
There are various Bank of Mum and Dad schemes available, especially ones provided by New Build developers. These initiatives enable first-time buyers to realise their property ownership aspirations with the support of their parents, who receive a monetary gift in return for contributing a minimum of 5% the purchase price of their child’s new home.
What are the pros and cons of acting as the Bank of Mum and Dad?
Parents assisting their children in buying their first home, can bring both fulfilling and challenging aspects which need to be considered. While it can be immensely gratifying to aid in such a great life milestone and get them onto the property ladder, it’s also important to consider the challenges it brings.
Pros of acting as the Bank of Mum and Dad:
Tax-free gifting
Providing financial assistance as a tax-free gift can effectively diminish the size of the donor’s estate and potentially reduce further inheritance tax liabilities.
Favourable mortgage terms
Amplifying the initial deposit enables the first-time buyers to access more favourable mortgage options, leading to lower interest rates and reduced monthly repayments.
Enhanced property acquisition
Augmenting the down payment can empower children to secure a more desirable property, potentially eliminating the need for subsequent purchases in the foreseeable future.
Expanded mortgage market
A substantial deposit broadens the array of mortgage deals available, granting greater flexibility and choice to the prospective homeowners.
Cons of acting as the Bank of Mum and Dad:
Mortgage limitations with loans
Opting for a loan rather than a gift can restrict the mortgage options accessible to the recipient, as some lenders may not accept loaned deposits due to vested interest.
Rigorous verification processes
Lenders and legal entities often demand thorough documentation and proof of the source of gifted funds, necessitating extensive verification procedures, including the submission of multiple bank statements and certified identification.
Risk of relationship strain
In scenarios involving co-ownership, the breakdown of relationships could potentially jeopardise the invested funds, which is why you should establish a deed of trust to safeguard against such risks.
Potential family discord
Financially supporting one child over others might lead to familial tension and strained relationships.
Financial trade-offs
Using personal savings to aid children could potentially compromise the financial security of yourself, which is why it's necessary to assess your financial situation before taking any major decisions.
What is the mortgage of Mum and Dad?
The bank of mum and dad mortgage
has gained traction as an alternative method of supporting children’s homeownership aspirations. This approach offers various avenues for parental assistance, each with its distinct benefits and disadvantages.
What is a guarantor mortgage?
A guarantor mortgage is a help to buy scheme, which involves leveraging parental savings or property as security to facilitate a child’s mortgage. While it increases the likelihood of the child obtaining a mortgage, there are considerable risks for parents, such as the potential loss of savings or even the parental home in the event of default.
Can your Mum guarantee your mortgage?
Yes, any family member can guarantee your mortgage; be it a parent, grandparent, uncle or even a close family friend. The guarantor of your mortgage will need to have a separate bank account to you, and must be someone you trust.
What is the maximum age for a mortgage guarantor?
Some mortgage providers may set a maximum age limit of 60 years of guarantors, yet refrain from imposing restrictions on the mortgage loan term duration.
On the other hand, certain lenders may not stipulate a precise upper age limit for guarantors but could advocate for the loan to be settled by the borrower between the ages of 75 to 85, ensuring timely repayment within a specified time frame.
What is a family offset mortgage?
In a family offset mortgage, the child benefits from reduced mortgage interest payments by linking their mortgage to a family member’s savings account. Although this can provide financial relief to the child, the parent might not earn interest on their savings and may face limitations if they wish to access their funds.
What is a joint mortgage?
Opting for a joint mortgage allows both parent and child to share equal responsibility for repaying the loan, enabling them to potentially qualify for a larger mortgage account based on their combined incomes.
However, the additional stamp duty rates, particularly for second homes, can significantly increase the property’s overall cost, while potential Capital Gains Tax (CGT) liabilities may arise upon the property sale.
What is a joint borrower, sole proprietor mortgage?
A joint borrower, sole proprietor mortgage permits parents to share the responsibility of mortgage payments with their child without claiming legal ownership of the property. This arrangement bypasses the second home stamp duty tax.
However, both parties must pass stringent affordability checks to demonstrate their capacity to meet mortgage obligations.
Is money taxable if parents provide it to children to buy a house in the UK?
In the UK, the act of gifting money from the Bank of Mum and Dad carries certain tax implications that need careful consideration. While immediate taxation is not applicable, there are several nuances of inheritance tax and the allowances associated with it:
Gifting allowances and inheritance tax exemptions
Under the current tax regulations, children can receive monetary gifts from the Bank of Mum and Dad without immediate tax implications. Individuals can make use of an annual gifting allowance of up to £3,000, which is immediately exempt from inheritance tax.
Any unused allowance from the previous year can be carried over, allowing for a cumulative gifting of £12,000 by two parents without triggering inheritance tax, provided no other substantial fits were made within the previous two years.
Exceeding the gifting limit
If there is a need to exceed the £12,000 threshold or if the full annual inheritance tax allowance is not available, the excess amount of the gift may become subject to inheritance tax.
Inheritance tax on gifts
In the event of the donor’s demise, within seven years of gifting the money, the gifted amount is considered part of their estate for inheritance tax assessment. If the total estate, inclusive of the gift, surpasses £325,000, a tax of up to 40% will be applicable to the excess amount.
It’s also worth noting that the tax liability on the gift decreases over time as the seven-year period elapses. The amount of tax due depends on the number of years that have passed since the gift was transferred, as indicated in the table below:
| Years between gift and death | Inheritance tax rate |
|---|---|
| Less than three | 40% |
| Three | 32% |
| Four | 24% |
| Five | 16% |
| Six | 8% |
| Seven or more | 0% |
Do you need to get financial advice when acting as the Bank of Mum and Dad?
We would always recommend that before you make any financial decisions to seek a financial adviser who will be able to best guide you through your own situation. There is no one-answer-fits-all, and it is wise that you seek help and advice from financial professionals.
What is the process of buying a house with the Bank of Mum and Dad?
Assuming the role of the Bank of Mum and Dad while helping to purchase your child's first home can be a stressful experience, much akin to buying a property yourself. When buying a house, it's always important to seek financial and legal advice.
Here are our steps to help your child buy their first home:
1. Conveyancer solicitor instruction
Initiating the process involves instructing a conveyancing solicitor, who will be responsible for managing the legal aspects of the property purchase. It’s important that your child informs the solicitor about the origin of the deposit, showing the financial assistance provided by you.
2. Coordination with a mortgage broker
Clear communication with a mortgage broker from the onset of the process can help you create a financial plan. Involvement of the Bank of Mum and Dad in the deposit can influence the type of mortgage offers available to your child.
3. Documentation and disclosures
Various stakeholders, including lenders, estate agents and solicitors will require detailed information regarding the financial arrangement. If the contribution is a gift, a formal letter specifying the amount should be provided. Alternatively, if it’s a loan, a detailed agreement outlining the terms, interest rate and repayment structure must be provided.
4. Compliance with Anti-Money Laundering Checks
Due to regulatory requirements, providing identification and showcasing the source of funds is vital. Fulfilling anti-money laundering checks confirms the legitimacy of the financial transaction.
5. Deed of trust preparation
To safeguard the interests of both parties, it is advisable to create a deed of trust, especially when the property purchase involves co-ownership. A deed of trust outlines the future implications of the financial contribution, offering clarity and protection in case of any future disputes or changes in circumstances.
Once these steps have been completed, then the process follows the usual house buying process.
What’s the quickest way to fund the Bank of Mum and Dad?
One of the fastest ways to rapidly generate funds for the Bank of Mum and Dad is to sell your current property to a reliable and trustworthy cash buyer like us!
Our seamless house buying process offers a transparent and fast service, with the potential for us to buy your house in as little as seven days, although many opt for a slightly longer timescale for added convenience.
When using our house selling solution, you can quickly secure the funds directly to your bank account within a matter of weeks, significantly reducing the waiting period usually associated with traditional open-market sales.
Our accelerated timeline enables you to promptly access the financial resources required to consider various options, including downsizing your property and subsequently allocating a portion of the generated profit towards supporting your children’s financial aspirations.
Our commitment to a hassle-free and fast house sale ensures a smooth transaction of your home, without all the delays or complications. Want to get the ball rolling?
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