Raising a deposit to buy your first home is more difficult than ever before. For first-time buyers, the Bank of Mum and Dad is becoming critical for securing the deposit needed to take the first step on the housing ladder.
According to a report published by the London School of Economics around a third of first-time buyers have some form of financial help from family and friends. It means that the Bank of Mum and Dad is now considered to be the sixth biggest lender in Britain. The research found:
- 92% of lenders said beneficiaries were their children, followed by grandchildren and parents
- 50% had provided some or all the money for a deposit
- A fifth gave a lump sum that was used to cover the costs associated with buying property, such as Stamp Duty or legal fees
- Other acts of support included acting as a guarantor for a mortgage or taking out a joint mortgage
When using the Bank of Mum and Dad, it often leads to large sums of money being handed over. As a result, there are some steps you should be taking before you proceed any further.
Be clear about the level of support you’ll receive: Your first question should be about the level of financial support that can be offered. Talking directly about money can be difficult, but as you’ll be making important decisions based on the amount it’s crucial. Understanding whether you’ll need to supplement the generosity of family and friends with your own savings can help you plan accordingly for making a purchase.
Check if it’s a gift or loan: According to the report, around three-quarters of money the Bank of Mum and Dad offers is a gift, while 23% is a loan. Don’t make any assumptions here. Ensure you directly ask whether they expect to be paid back or not. Miscommunication could lead to financial insecurity for you both in the future.
If it’s a loan, making it part of your budget: Should your parents loan you money, they’re unlikely to set out a strict schedule. In fact, 82% don’t charge interest on the money lent and two-thirds expect payments as and when the beneficiary can afford it. However, it should be included in your budget calculations. Taking on a mortgage is a big step that can place your finances under pressure, be sure you can meet all your commitments.
Ask about restrictions: As they’re loaning or gifting you the money, parents may have a clear idea of how they want it to be used. Asking whether there are any restrictions can help make sure you’re all on the same page before you start looking for a property. One of the most common concerns benefactors have is the potential for relationships to break down. Addressing how the money received would be distributed in this situation, and formalising it where necessary, can ease worries.
Take financial and legal advice: Less than a quarter had drawn up a formal deed of gift or loan contract. It’s an oversight that could lead to complications in the future, particularly if there is a disagreement. Financial advice can also give parents and grandparents confidence in their financial situation and understanding of the impact their generosity will have on their wealth.
What are the alternatives when the Bank of Mum and Dad isn’t an option?
While the Bank of Mum and Dad is becoming an increasingly important part of financing property sales, it’s not an option for everyone. Luckily, there are alternative ways to make buying a first home that bit easier.
100% mortgage: 100% all but disappeared following the financial crisis. However, they have started to come back on to the market in small numbers. If you don’t have a deposit, but want to buy quickly, they can provide you with a solution. One point to note is a 100% mortgage is likely to have higher rates of interest, which would increase monthly repayments. If you’d like help securing a mortgage, please get in touch.
Shared ownership property: Shared ownership properties have been rising in popularity. They allow you to buy a portion of a property while renting the remainder. If you’re struggling to get on the property ladder, this can help for two reasons. First, you’ll need to borrow a reduced amount, compared to buying a standard home, from the bank. This, in turn, means that less deposit will be required.
ISAs that deliver bonuses: When you’re saving for a deposit, every little bit helps. There are two specialist ISAs (Individual Savings Account) that can help you here when saving for your first home. The Help to Buy ISA allows you to open an account with an initial deposit of up to £1,200 and add £200 per month. You’ll then receive a 25% bonus from the government to a maximum of £3,000.
The Lifetime ISA is another option. Each tax year, you can deposit up to £4,000, receiving a 25% bonus. A Lifetime ISA is available for those aged between 18 and 40. Should you withdraw the money before the age of 60 for a reason other than buying your first home, you’ll face a penalty which may mean you receive less than what you put in.
Help to Buy equity loan: This loan from the government allows you to purchase a home with just a 5% deposit. Help to Buy can give you up to 20% (40% in London) of the property’s value to act as a deposit, meaning you only need to take out a mortgage for the remaining 75%. It can mean you don’t need to spend as long saving for a deposit and allow you to purchase a more expensive house.
The Help to Buy loan can only be used for new builds and it cannot have a value of more than £600,000. If you choose this option, you need to keep in mind you will have to repay the loan while making mortgage repayments.
If you’re a first-time buyer looking for support when searching for a mortgage, whether you have help from the Bank of Mum and Dad or not, please contact us.