Mortgages through the bank of mum and dad

The media is full of stories about how hard it is for first-time buyers to get a foot on the property ladder and how many are turning to the ‘bank of mum and dad’ to help – including older children who have long since cut the apron strings.

One of the main reasons for parents helping is to improve on their child’s credit worthiness by acting as a guarantor or providing a deposit to help them get a better mortgage rate. These options are different to giving a financial gift of money, which could have a tax implication.

If parents go down the route of offering to deposit a lump sum with a mortgage lender, as a form of financial guarantee, this will have the least tax implication as the funds are only there to act as security. It is the same if parents offer their own property as security.

In the past few months some lenders have started offering 100% mortgages again to first time buyers. At present these deals require mum or dad to deposit funds with the lender for two years and this is usually 10% of purchase price. Again, this has very little tax implication.

Other options include:

Guarantor mortgages
With a guarantor mortgage, a parent or close family member guarantees the mortgage debt. This means that if the buyer misses their mortgage repayments the guarantor will have to cover them.

This could also entail the parent being named on the mortgage but not the deeds.

Family offset mortgages
Parents or grandparents put their savings into an account linked to their child's mortgage. The money in the savings account is then deducted from the mortgage, making the child's repayments cheaper.

Family deposit mortgage
A family member deposits cash in a special savings account and the money is then held as security against the mortgage.

Flexible Family Mortgages
The parent or family member uses some of the value in their own property as security or places savings in an offset account.

Gifted deposits
The parent gives a deposit to their child for the purchase of property.

Joint ownership
In this case both the parent and child will be named on the mortgage and the deeds. The size of the loan will be based on the earnings or assets of both parent and child and if one of them stops paying the other one will become liable for the debt.

One of the best ways to find the right mortgage is to seek help from a mortgage broker. A mortgage broker works on a customer’s behalf and negotiates between them and the mortgage lender.

There are two types of mortgage broker, those who use a panel of lenders and ones that search the whole mortgage market to find the most suitable lender.

Our team of brokers provide a whole of market service, searching over 50 lenders. The great news is that the service is fee free. For first-time buyers, or people with a poor credit history, a mortgage broker can offer advice on how to build a credit score that attracts lenders. Often it is about knowing the right lenders to approach.

As there is a risk of repossession if mortgage payments are not maintained it is important to make an informed choice.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

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