The Bank of Mum and Dad has been helping children save for a property deposit for decades and it is forecast that £25 billion will be provided by parents in the next three years.
Novice purchasers may increasingly need help as one of their low-deposit lifelines is about to be cut. The Help to Buy equity loan scheme – which allows first-timer buyers to reserve a new build home using a 5% deposit – closes to new applications on 31st October 2022, before winding up completely on 31st March 2023.
Whether you’re sitting on a cash lump sum, have equity in your property or have a good credit history, there are a number of ways to help a child save for a deposit. In this article we answer the most commonly asked questions about the Bank of Mum and Dad.
Q. Can I simply transfer money from my account to my child’s?
A. If you have cash savings, you can transfer any amount to your child to help with a deposit. Although it’s the simplest way of assisting, your child will need to prove where the money came from. To attest this, parents will need to produce a ‘gifted deposit’ letter for the mortgage lender – you can ask a conveyancing solicitor to draw one up on your behalf.
Q. Will my child have to pay tax on any cash I gift them
A. Possibly. Each parent has a £3,000 annual gift allowance that can be given without tax implications, and the allowance can be rolled over for two years. In theory, both parents could each gift £6,000 in one go and it would not become an inheritance tax issue. The water’s muddy if a one-off cash gift exceeds the allowance and those giving the gift die within seven years of providing the cash. In some cases, the child may have to pay inheritance tax.
Q. I want my money back, so can I loan it to my child?
A. If you have cash but need it repaid, you can draw up a loan agreement with your child. You can set your own interest rate and repayment schedule but be aware that mortgage lenders will take the loan repayments into account when deciding if your child can afford the mortgage debt.
Q. Can I borrow money from the bank to give to my child
A. According to an article published by the HomeOwners’ Alliance, the Bank of Mum and Dad lent an average of £20,000 in 2020 but it’s a lot of money to find. Parents with a good credit history can take out a personal loan and gift this money to their child but there’s a word of warning. Some mortgage lenders will not consider a deposit that’s made up – in part, or in full – of borrowed money.
Q. Can I free equity in my own home to help with a deposit?
A. Many parents are cash rich thanks to their property but this money is usually inaccessible unless a property is sold. If a parent isn’t moving to somewhere cheaper to free equity, there are alternatives. Remortgaging to release funds is one option, as is taking out a second charge mortgage on the property to raise money. We would exercise great caution if considering an equity release scheme – professional financial advice is strongly recommended.
Q. I want to keep hold of my cash but still help – is there a way?
A. A family offset mortgage allows cash saved by a parent to lower the child’s monthly repayment or shorten the term, without any cash changing hands. The parent’s savings account is linked to the child’s mortgage, with the amount of savings deducted from the total borrowing figure. As many as three savings accounts can be linked to the mortgage and the parents retain instant access to their savings. It’s worth noting the choice of savings accounts and interest rates may be restricted when using a family offset mortgage.
Q. I don’t have a lump sum of money, can I still help?
A. Parents who pass financial health checks, own a property or are in receipt of a regular income can still help a child buy a property, even if they don’t have £20,000 lying about. Options include becoming a guarantor on your child’s mortgage or even getting a joint mortgage – two ideas to discuss with an independent mortgage adviser.
Research from Legal & General found 17% of over 55s experienced a lower standard of living after helping their children buy a house, so any cash gifts or financial assistance should be planned in conjunction with a financial adviser.
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