First time buyers can experience significant challenges getting started on the property ladder. Increasing house prices coupled with rising living costs and rental expenses can make it seem impossible to save for a deposit. Turning to family, not just Mum and Dad but also siblings or Grandparents, to help fund part of a deposit is becoming increasingly common and here we look at some options for how family can help and points to consider for all sides involved. Any of the options may help in achieving lower interest rates or increasing the amount that can be borrowed so that you can buy your dream home.
What are my options?
There are a number of ways family can help with deposits and we will look at each in turn:
- A financial gift
- A formal loan
There are other options outside of family available including different mortgage products to help you get on the property ladder which we will look at in a later guide.
Can I have a gift of money towards a house purchase?
You can make have a gift from family to help you purchase your home. This can be funded in many ways, whether from savings and investments, release of pension funds or your family refinancing their own property. Most banks will accept this option however the funds will need to be a genuine gift with no repayment terms and no interest being gained in the property by the giftor. The gift will need to be declared to the bank when applying for a mortgage and the giftor will usually have to sign a declaration confirming the gift and provide identification and evidence of the available funds. This information will also need to be provided to the Solicitor who deals with the conveyancing as they have an obligation to both the mortgage lender to check the funding details for the purchase and also to their regulator to ensure that they comply with the stringent Money Laundering Regulations that are in place. It is also important to consider how a gift will be protected and whether a Deed of Trust to protect is put in place in the case of a joint purchase stating the amount of money gifted to each purchaser and protecting that amount in the event of a separation in future.
In this situation giftors would be advised to seek professional advice on any potential tax implications for them, either at this point or further down the line, as gifts can become subject to inheritance tax. It is also important to consider any effect it may have on their living standards if funds have been taken from their savings or pension pot. The giftors may also want to consider updating their Will to reflect the gift in relation to future inheritance.
Can I have a family loan to purchase a house?
A loan can be provided by family if they do not want to or cannot afford to provide you with a long term gift. Loan agreements are relatively straightforward to set up and should state the repayment term and any interest payable. The loan would be registered against the property to protect it after the your main mortgage. The loan arrangement would need to be declared to any mortgage lender at application stage, and unfortunately may affect affordability calculations or the amount which you borrow as the loan repayment would be taken into account in any calculations. Having a loan from family would very likely restrict the number of lenders who would provide you with a mortgage.
How will using the Bank of Mum and Dad affect my property purchase?
There isn’t much difference in the process followed when buying a house using the Bank of Mum and Dad:
- Let your solicitor know as early as possible in the process. Ensure you have filled out any source of funds details fully with as much information as possible. Also ensure that you have let your mortgage broker know so that they can provide the information to your chosen mortgage lender at the start of the application.
- Get evidence of the gift or loan. Solicitors and lenders will need to see evidence of the money. A signed gift declaration will be required, or loan agreement if money is being provided by way of a loan
- Provide ID. Your giftors will need to provide ID evidence. Find out from your solicitor what they need early on in the process and provide it as early as possible.
- Collect your evidence of funds. Your solicitor will need to see evidence how the funds for the gift have been built up. Your parents will need to provide bank statements and explanations for payments to satisfy Money Laundering Regulations.
Pros of using the Bank of Mum and Dad
- A tax free gift – provided parents survive for 7 years after making the gift it will become inheritance tax free and potentially reduce inheritance tax in future
- The dream home – a larger deposit could mean a boost up the property ladder to a better home or location and not having to move in a couple of years
- More mortgage options – a bigger deposit might enable you to access better mortgage deals including lower interest rates.
Cons of the Bank of Mum and Dad
- Reduced mortgage options – if a loan is being used many mortgage lenders will not accept this as they don’t like someone else having a financial interest in the property.
- Relationship breakdowns – potentially an ex partner could walk away with part of the gifted deposit if it is not properly protected by a Deed of Trust
- Additional information – the additional declarations, ID and evidence of funds can be onerous requirements and may be seen as intrusive
- Family frictions – if parents provide a gift to one child in the family this can cause family tensions, or if parents have reduced savings they have to be careful not to leave themselves in a position where they aren’t struggling in future.
If you have any questions on purchasing a property or providing a gift or loan to a family member towards a purchase please contact our team so we can help advise you on the process on email@example.com