From piggy banks to property: How parents can help with your mortgage

Buying a first home is tougher than ever, and many parents want to help with mortgages to help their children get on the housing ladder.

With house prices soaring and mortgage rules getting stricter, saving for a deposit or securing a loan can feel impossible for young buyers.

The good news?

There are other options available on the mortgage market. You can lend a hand, whether it's through a joint mortgage, acting as a guarantor, gifting a deposit, or even tapping into your own home's equity.

However, every option comes with its risks and responsibilities, so it's important to know what you're signing up for. In this blog, we will break down the four most common ways that parents help their children get their first home.

‍

1. Joint mortgages
2. Remortgaging to release equity
3. Guarantor mortgages
4. Deposit help

‍

Disclaimer: This blog is for general guidance only and does not constitute financial advice. It is important to seek independent financial advice before making any decisions. This blog is not a referral for any specific mortgage products.

‍

Important Reminder: Your home and/or your parent's home may be repossessed if you do not keep up with mortgage repayments.

‍

1. Joint Mortgages

A joint mortgage allows both the parent and the child to co-sign the mortgage agreement. This can be a good option for first-time buyers who struggle to secure a mortgage due to a lower income or limited credit history. By combining incomes, they may qualify for a larger loan or better interest rates.

Pros:

• Increased Borrowing Power: Adding a parent's income can lead to a larger mortgage and potentially better rates.
• Financial Guidance: Parents involved in the mortgage may have a say in property-related decisions, providing valuable experience and oversight.

Cons:

• Financial Risk: If the child struggles with repayments, the parent may be held responsible, potentially impacting their credit score and financial stability. Failure to meet mortgage repayments can result in the repossession of the property.

• Affecting Future Borrowing: A joint mortgage counts as existing debt, which may limit a parent's ability to take out future loans.

‍

Important Risk Warning: As a co-signer, the parent is liable for repayments, which means that if the child is unable to meet their financial obligations, it could negatively impact both parties' credit scores. There is a risk of property repossession if mortgage repayments are not kept up. Always ensure you understand the full financial commitment before entering into a joint mortgage agreement.

‍

Seek independent financial advice before proceeding with a joint mortgage.

For more information, click here.

‍

2. Remortgaging to Release Equity

Remortgaging allows parents to free up cash by borrowing against their home's equity, which can then be used as a deposit for their child. However, this means increasing their debt and possibly extending their mortgage term.

Pros:

• Better Mortgage Deals for Your Child: A larger deposit can lower monthly repayments and secure better interest rates.
• One-Time Assistance: Unlike a joint mortgage, this method ensures the child is solely responsible for repayments.
• Potential Inheritance Tax Benefits: Gifting money now may reduce inheritance tax liabilities later.

Cons:

• Increased Debt: Taking on more debt means higher monthly repayments, which can put a financial strain on parents.
• Fees and Market Risks: Legal fees, valuation costs, and possible early repayment charges should be considered. Additionally, if the housing market drops, there is a risk of negative equity.

‍

Important Risk Warning: Remortgaging may put you at risk if the housing market declines, as this could lead to higher repayments or negative equity. If you are already in a financially strained position, this option may not be suitable for you. Always consider the long-term implications before proceeding with remortgaging.

‍

Seek independent financial/ personal tax advice before considering this option.

For more information, click here.

‍

3. Guarantor Mortgages

A guarantor mortgage allows parents to use their property or savings as security without giving a cash deposit. This can help children secure better loan terms, but it comes with financial risks for the guarantor. We strongly recommend seeking separate economic and legal advice before deciding to act as a guarantor.

Pros:

• Easier Approval: This helps first-time buyers qualify for mortgages they wouldn't have qualified for on their own.
• Better Rates & Terms: The lender considers both the parent's and child's financial profile, increasing the chances of securing favourable terms.
• No Cash Deposit Required: Parents provide security rather than a financial gift.

Cons:

• Financial Liability: If the child misses payments, the guarantor is responsible, potentially risking their property or savings.
• Credit Impact: Missed payments affect both the parent's and child's credit scores.
• Long-Term Commitment: The guarantor remains tied to the mortgage until it's paid off or refinanced.

Important Risk Warning: The guarantor takes on significant financial liability. If your child defaults on payments, you could be required to repay the mortgage, which could affect your credit score and financial situation. In extreme cases, this could lead to the repossession of your home.

Seek independent financial advice before agreeing to act as a guarantor.

For more information, click here.

‍

4. Deposit Help: The "Bank of Mum and Dad"

Gifting a deposit is one of the simplest ways parents help their children get on the property ladder. This method requires no long-term financial commitment, but it may not be feasible for every family.

Pros:

• No Ongoing Responsibility: Once the deposit is gifted, the child takes full responsibility for the mortgage.
• Improved Mortgage Offers: A larger deposit can result in reduced monthly repayments and lower interest rates.
• Inheritance Tax Planning: Gifting money now may reduce future inheritance tax liabilities.

Cons:

• Financial Strain: Not all parents can afford to gift a lump sum without affecting their financial security.
• No Legal Ownership: Unlike joint mortgages, parents don't have a legal stake in the property.

Important Risk Warning: While gifting a deposit does not create ongoing liability, it can still strain your financial position. Always ensure that gifting a deposit is affordable and won't negatively affect your financial security.

Seek independent financial advice/ personal tax advice before gifting a deposit.

‍

Final Thoughts

Before deciding on any mortgage support option, parents should always seek independent financial advice to fully understand the implications. Setting clear savings goals, sticking to a budget, and consulting with financial advisers or mortgage brokers can make a significant difference.

Patience and realistic expectations are also important. Saving for a house deposit takes time and discipline, but the rewards of homeownership are well worth the effort.

Important Reminder: Your home and/or your parent's home may be repossessed if you do not keep up with mortgage repayments.

‍

Start your journey to homeownership today! Learn more now!

Call us for free initial mortgage advice at: 0800 292 2557