The Bank of Mum and Dad
If you have been dreaming of buying your first home, but can’t seem to get the cash together, don’t worry - you are not alone. One in four properties purchased this year will be financed, at least in part, with the help of parents and the so-called 'Bank of Mum and Dad'. According to research by Legal and General, parents will hand over an average of £17,500 per child to help with a deposit, surveying fees, legal costs and stamp duty.
“We’ve seen property prices rise in different areas up and down the country over the last few years, which can make it difficult for first time buyers to get together the deposit they need to get on the first rung of the property ladder, particularly if they are having to pay out money rent” said Adrian MacDiarmid of Barratt Homes.
“What we’re seeing is many first-time buyers having to rely on parents or grandparents to help – sometimes being given their inheritance early or using parents’ savings. The so-called Bank of Mum and Dad is assisting in providing large cash deposits as gifts.”
But are there ways around this reliance on lump sums?
Other Ways that Parents can Help
They can act as guarantors
If your parents can't help you with the deposit, they may be able to act as guarantors for you instead. This means that if you are unable to make the mortgage payments, your parents guarantee to pick up the bill.
However it’s worth remembering that your parents would be providing additional security, which will be at risk if you default on the mortgage. Whilst parents are keen to assist their children in getting on the property ladder, it shouldn’t necessarily be done at the expense of their financial security or indeed their standard of living.
Help with a family offset mortgage
Another option is a "family offset" mortgage where parents use their savings to help their children or grandchildren on to the property ladder. These deals allow you to retain ownership of the money that you put up for a deposit.
The advantage is that the savings remain in the name of the parents and can revert to them at a later date. With this type of deal, you put your cash into a linked savings account. The money acts as a deposit and will lower the monthly mortgage repayment, as interest is charged only on the balance remaining.
Don't miss out on Government help
There are a range of Government schemes now available that provide an alternative for getting a foot on the property ladder without the reliance of the Bank of Mum and Dad.
Help to Buy ISA
While thousands of first-time buyers say they would never get on the housing ladder without some serious help from their parents, many people may be missing out on another source of ‘free money’ that can help turn housing dreams into reality. The easily overlooked extra cash comes courtesy of the Government’s Help to Buy ISA scheme and can offer a helping hand for those looking to get on the property ladder for the first time.
Here the Government will boost your savings by 25% – so, for every £200 you save, you’ll receive a tax-free government bonus of £50 – with a maximum government bonus of £3,000.
What’s more, these accounts are available to each first time buyer, not each household. This means that if you are planning to buy with your partner, for example, you could double your money and receive a Government bonus of up to £6,000 towards your first home.
Help to Buy Equity Loan
Through Help to Buy you can apply for a Government-backed equity loan. You will only need to raise a 5% deposit, with the Government providing a 20% equity loan (15% in Scotland, 40% in London). This leaves you only needing a mortgage for the 75% difference (80% in Scotland, 55% in London). The equity loan is interest-free for five years and after that interest is 1.75% – cheaper than most mortgages.
Or, if you have a sum of money saved, then thanks to mortgage guarantee schemes agreed between the Government and the banks, there are now more 95% mortgages available.