The Bank of Mum and Dad – How to Help Your Children Buy a Home

Accepting a gift or taking out a loan from your parents to buy a property can be a viable option, especially in areas where real estate is expensive and securing a high value mortgage can be challenging. Often in these scenarios, parents gift or lend you money for the deposit and you apply for a mortgage in your own name (and your partner’s name if applicable).  

If the money is a loan and not a gift, you should draw up an agreement that sets out the terms of the loan with your parents, such as any interest due and the payback period. The agreement should also determine what happens if any of the parties pass away or if your parents request an early return of the loan. 

You’ll also have to declare the loan from the Bank of Mum and Dad to your mortgage lender. This is likely to have implications for your mortgage application as loan repayments will reduce the income you have to pay into a mortgage. The lender may offer you a smaller loan. You'll need to shop around, as some banks don’t accept a deposit that is partially or fully funded via a loan. Read more in our comprehensive house mortgage deposit guide. 

Interested in this approach? Make sure you consider the benefits as well as the potential drawbacks and considerations. 

Most lenders will accept a deposit that has been partially or fully gifted from a relative. A bigger deposit means buyers may be able to get a lower LTV (loan-to-value) mortgage, and potentially borrow more money and access better mortgage deals.

However, note that lenders will likely ask for a formal confirmation that you received the money as a gift. This is to ensure that the donation was not in fact a loan that may affect affordability checks. It’s also necessary to clarify this and make sure no one else has a stake in it in case they need to repossess the property.

You won’t have to pay tax on a monetary gift used to boost your deposit, nor will your parents.  However, you may be liable to pay an Inheritance Tax if the gift exceeds more than £3,000 per parent per year following on from the date of the loan. For example, if your parents loaned you £30,000 2 years ago but both have now passed away, you may have to pay Inheritance Tax on £18,000.

Find out more about how to save for a mortgage deposit.

It's recommended that you seek legal advice before entering into a loan agreement with your parents. A professional can help outline the legal and financial implications, prepare a formal loan agreement and ensure that both parties are protected. 

This kind of arrangement can help you leverage familial support to achieve homeownership, but it's important to handle it with the same seriousness and formality as a bank loan to protect both your financial interests and your personal relationships.

A family offset mortgage involves linking your parents' or relatives’ savings account to your mortgage, offsetting the amount of the loan which is interest bearing. For example, if your parents agree to put up £50,000 of their savings for a proposed mortgage of £250,000, you’ll only be paying interest on £200,000. This means lower repayments and less total interest paid on the loan.

Another option is to take out a joint mortgage with your parents. In contrast to the joint borrower sole proprietor mortgage, with a joint mortgage, your parents are named on the title deeds. The advantage is that their income is considered, meaning you could be able to take on a larger loan and afford a more expensive property.

The biggest drawback in taking out a joint mortgage is that if your parents already own a property, the house you’re buying will be classed as their second property and be subject to the second home Stamp Duty surcharge – an additional 3% on top of the standard rate.

Also, your parents would be liable for any Capital Gains Tax liabilities if the property is sold at a profit down the line.

Getting a joint mortgage with parents involves shared responsibility and can lead to potential complications.

Here’s an overview of the key aspects of taking out a joint mortgage with your parents. 

Benefits of Joint Mortgage with Parents

1. Increased buying power: combining incomes with your parents can increase the amount you can raise on a mortgage, allowing you to look at more expensive properties 

2. Easier qualification: having more than one party on the mortgage can improve your chances of approval, especially if your parents have a strong credit history and stable income 

3. Shared costs: all associated costs of purchasing and maintaining the home (like deposit, monthly payments, maintenance and taxes) are shared, which can lessen the financial burden on everyone 

Drawbacks of Joint Mortgage with Parents

1. Complex exit strategy: if one party wants to sell or move out, it can be complicated to manage without selling the property or refinancing the mortgage 

2. Impact on credit: if any co-borrower fails to meet the payment obligations, it can negatively affect everyone’s credit score involved 

3. Legal and financial entanglements: your financial fortunes are tied together. If your parents encounter financial difficulties, it could impact your ability to keep the property 

Considerations for Joint Mortgage with Parents

• Legal agreement: it’s important to have a legal agreement outlining everyone's responsibility and what happens in various scenarios, such as one party wanting to sell their share 

• Mortgage type: you’ll need to decide whether all parties will be co-borrowers (jointly sharing the obligation to repay the entire mortgage) or if your parents will be guarantors (supporting the loan but not having ownership interest) 

• Long term plans: discuss and plan for long term scenarios, including what happens if your parents retire or if one party wants to exit the arrangement 

Professional Advice for Joint Mortgages

• Legal counsel: a solicitor can help draft agreements that define ownership shares, rights, and responsibilities, and can navigate you through the legal implications of a joint mortgage 

• Mortgage broker: a broker such as John Charcol can explain different mortgage options and help find the best rates and terms to suit your joint needs 

Taking out a joint mortgage with your parents can be a strategic move for home ownership, but it requires careful planning and consideration to ensure that it benefits all parties and safeguards relationships and financial health.

A family deposit mortgage – which is also known as a family assist mortgage – allows your parents or relatives to borrow against the equity in their home and offer this as a gift towards your deposit. This can make a no-deposit mortgage possible.

Meanwhile, a Family Springboard Mortgage may also open up the prospects of a 100% mortgage. With a mortgage of this type, your parents or relatives can transfer the equivalent of a deposit – say 10% of the property's purchase price – to a savings account held by the lender. This is then put up as security on the mortgage loan. Your relatives will earn interest on this savings account and after a set period, and assuming the mortgage payments have been kept up, they'll be able to transfer their savings out of the account.