Building up a deposit for a first home is not easy, particularly with rising property prices and the increased cost of living. There’s a limit to how much you can save by simply cutting back on lattes and streaming services, leaving many people in their 20s and 30s wondering if they will ever get on the property ladder.

The Office for National Statistics (ONS) found that in 2021, 28% of 20-34 year-olds were still living with their parents. And research from Barclays shows that the average first-time buyer’s deposit in the UK is now over £61,000, with 35% of respondents saying that saving for a deposit was the biggest obstacle to home ownership.

Finding financial support from older relatives has therefore become a growing necessity for many first-time buyers, and parents are stepping up to the challenge. Research by Generation Home found just under half of the parents surveyed would prioritise helping their child fund a deposit for their first home (46%).

Average house prices across the UK have risen by more than 67% over the last decade

What is “the Bank of Mum and Dad” - and why is it needed?

Spiralling house prices, record levels of inflation and rising fuel, food, and energy costs have pushed the dream of home ownership even further out of reach for many young people. This has led to an increasing number of parents stepping in to help their children get on the property ladder – a financial phenomenon often referred to as “the Bank of Mum and Dad”.

Most long-term homeowners in their 50s and 60s have benefited from low house prices and high growth in recent decades. This has made it easier for them to save and invest throughout their working life – so many are sitting on a nice nest egg, ready for retirement.

Conversely, younger people trying to secure their first home haven’t been so lucky. Average house prices across the UK have risen by more than 67% over the last decade, from £167,854 to £281,161, according to ONS data published in June 2022. This is made worse by the fact that salaries haven’t kept pace – weekly wages have increased by only 36% since 2010.

A parent or grandparent can act as a guarantor

How parents can help their children fund a home purchase?

There are a number of different options for parents helping children buy their first home. For example:

1. Funding the deposit as an outright gift

You can gift your child up to £3,000 (per parent or grandparent) without worrying that they’ll ever have to pay inheritance tax on that amount. If you give a larger cash gift, your child or grandchild won’t pay inheritance tax on it, providing you live for more than seven years after the gift is made.

2. Providing the deposit in the form of a loan

You can draw up a loan agreement, which sets out any interest being paid on the loan and when it needs to be repaid – for example, when the property is sold. You should also include what happens to the money if anyone involved in the loan dies, or if the parents need the money back.

3. Acting as a mortgage guarantor

A parent or grandparent can promise to cover the mortgage repayments if the home buyer fails to pay. The guarantor must put up something as security (typically another property or savings) to reduce the required deposit. This isn’t a step to be taken lightly, as you could be putting your own home at risk.

4. Purchasing the property yourself (solely or as a joint owner)

An increasing number of lenders will now allow the mortgage to be held in joint names but the property held in one name only. This means the parent need not be on the title deeds and can sidestep some of the potential tax issues they would otherwise be exposed to.

5. Buying the property and renting it to the child at a competitive rate

Alternatively, you can purchase the property outright and arrange for your child to rent or buy it from you over time. Bear in mind this could increase your tax exposure in several areas.

6. Family offset mortgages

Some lenders offer lower interest rates and more accessible lending criteria if parents place their savings in an offset account.

A bigger deposit gives more mortgage choices, increasing the likelihood of a better mortgage deal at a lower rate

The best option will depend on various factors such as the property’s value, the amount of savings the parents hold (and how much they are willing to use for this purpose), the potential tax exposure it might create for the parents, and the child’s income and credit rating.

It’s important to remember that your home may be repossessed if you do not keep up with your mortgage repayments. Due to the risks involved, you should always seek advice from a qualified mortgage adviser before making any decisions.

What are the benefits?

There are several benefits to using the Bank of Mum and Dad to help fund a home purchase:

  • It can make it easier for a young person to buy their first home and may enable them to secure a better house than they otherwise could have. This could mean they don’t need to move again for a while, saving them thousands on the cost of buying and selling a property in future.
  • Years of rental expenditure can be avoided, allowing them to invest that money into their own property rather than paying for someone else’s.
  • Increases in the property’s value will make it easier to trade up when needed. And with an increase of 12% in the last year, it looks like it’s only going to get harder for first-time buyers.
  • A bigger deposit gives more mortgage choices, increasing the likelihood of a better mortgage deal at a lower rate.
  • It reduces the impact on credit ratings and can make future borrowing more accessible.
  • It provides more security than renting a property so young people can put down roots and make the place their own, rather than worrying about rent increases and no-fault evictions.
  • It presents an opportunity to reduce inheritance tax, provided the money is gifted outright.

What are the disadvantages?

Using the Bank of Mum and Dad is not the perfect solution, and there are a number of potential drawbacks to consider:

  • The parents and the child may have different ideas about the method and the amount of support offered. For example, a parent may be prepared to help, but not gift an unconditional lump sum, which may cause family friction.
  • The parents may disagree with the child’s choice of property.
  • If the property is to be jointly purchased with the child’s partner, there may be questions over the partner’s contribution.
  • If the child runs into financial difficulty, this can also cause problems for the parents – for example, loss of capital or impacted credit rating.
  • The child may take their parents’ contribution for granted and place a lower value on the property than if they had bought it independently.

Of course, these problems won’t be an issue for many families. Open communication and clear terms and conditions can help avoid potential conflicts.

The golden rules

When considering helping children buy a home, parents should be careful they are not persuaded to give away more than they can afford to lose. If they leave themselves short in retirement, it’s likely to cause problems in the future.

At the same time, children need to keep a watch on their credit rating – lenders will check when you purchase and when you want to re-mortgage.

Most importantly, both parties need to be clear, open, and transparent with each other from the start. Listen carefully to the other party if disagreements arise, and parents, in particular, need to remember that everyone involved is an adult with their own views.

And regardless of your proposed approach, always seek professional advice in advance so the full financial implications are understood.

Life Landscaping® from Amber River

An Amber River financial planner can help you build a financial plan to accommodate everyone in your family. So, if you are considering helping your children purchase their first home, or if you’re buying a property with a contribution from mum and dad, our experts can offer advice on the best way to achieve your goal.

Get in touch

To speak to one of our team, arrange an appointment or find out more, call 0800 915 0000, or alternatively use our contact form here.