Ever heard of the “Bank of Mum and Dad?”
It’s not a real bank, but a term we use in the UK to describe parents and family members helping their kids buy their first home.
With house prices being what they are, it’s becoming more and more common – in fact, over half of first-time buyers under 35 now get a financial leg-up from their family, according to Legal & General’s 2023 report.
While this kind of help can be a real lifesaver, it’s not always a simple decision. So, let’s take a closer look at the Bank of Mum and Dad, weighing up the good and the bad, and exploring some other ways to make your homeownership dreams a reality.
Understanding the Bank of Mum and Dad
So, what exactly does the Bank of Mum and Dad do?
It can step in a few different ways:
- Gifting a Deposit: This is a straightforward way to help, where parents or family give money towards the deposit. But, it’s important to be aware that large gifts might have tax implications if the person giving the money passes away within seven years.
- Loaning the Money: Another option is for family to loan the money for the deposit or even the entire house purchase. It’s crucial to set clear terms, like interest rates (if any) and a repayment schedule, to avoid any misunderstandings down the line.
- Guarantor Mortgages: Here, a family member basically acts as a back-up for the mortgage. If the borrower can’t make the repayments, the guarantor is responsible. This can be a big ask, so it’s important to understand the risks involved.
It’s worth noting that money isn’t the only thing the Bank of Mum and Dad can offer. Practical help, like letting you live rent-free while you save, or emotional support during what can be a stressful process, is invaluable too.
Of course, there can be emotional and relational aspects to consider when accepting financial help from family. It’s important to have open and honest conversations about expectations and make sure everyone is on the same page to avoid any awkwardness or misunderstandings.
About mortgages
For first-time buyers, getting a mortgage can seem a bit like learning a new language.
But don’t worry, it’s not as complicated as it might seem. Essentially, you’ll apply to a lender (a bank or building society) who will assess your finances and, if they’re happy, offer you a loan to buy your home.
The loan is secured against the property, which means if you don’t keep up with repayments, they could repossess it.
One of the biggest hurdles for first-time buyers is saving up a deposit.
This is the upfront cash you put towards the property, usually a percentage of the purchase price. The bigger your deposit, the less you need to borrow and the better the interest rates you can usually get.
Currently, the average first-time buyer in the UK puts down around 15% of the property value, although this can vary depending on where you live and your financial situation.
Speaking of interest rates, it’s important to understand the different types of mortgages available. Fixed-rate mortgages mean your monthly repayments stay the same for a set period (e.g., two or five years), giving you some peace of mind. Variable-rate mortgages, on the other hand, can fluctuate with the market, meaning your repayments could go up or down.
It’s also important to remember that the mortgage itself isn’t the only cost involved in buying a property. You’ll need to factor in things like stamp duty (a tax on property purchases), legal fees, and valuation costs.
To give you an idea of the current market, the average house price in the UK is currently around £290,000 according to the Halifax House Price Index for May 2024, while the average interest rate for a two-year fixed-rate mortgage is around 4.5% according to UK Finance. Remember, these are just averages, and your own situation may vary.
Pros and cons
Let’s face it, the Bank of Mum and Dad can be a game-changer for getting on the property ladder.
It can fast-track your homeownership dreams by helping you overcome the biggest hurdle for many first-time buyers: saving up a deposit. And with a bigger deposit, you’re likely to snag a mortgage with a lower interest rate, saving you money in the long run.
Plus, having your family’s support and guidance throughout the process can be invaluable, offering advice and reassurance when you need it most.
However, it’s important to be realistic about the potential downsides too.
Depending on your family’s financial situation, helping you buy a house could put a strain on their resources, potentially impacting their retirement plans or other financial goals. It’s also crucial to have clear and open discussions about any financial arrangements to avoid misunderstandings down the line.
Legal documents might be necessary to formalise loans or gifts, and it’s wise to be aware of any potential tax implications.
Alternatives
If the Bank of Mum and Dad isn’t an option, don’t worry! There are other ways to get on the property ladder.
Shared Ownership remains a viable option, where you buy a share of a property and pay rent on the rest. It’s a good way to get started with a smaller deposit.
There’s also the Lifetime ISA, a savings account with a 25% government bonus on top.
Some lenders offer ‘guarantor mortgages‘, where someone else (not necessarily a family member) acts as a back-up for your repayments. These can be useful, but the ‘guarantors’ will need to have disposable income for the affordability checks.
The Bank of Mum and Dad is clearly playing a significant role in the UK property market.
In fact, it’s estimated to be worth a staggering £8.1 billion in 2023, according to Legal & General. That’s a huge amount of money that’s helping young people achieve their homeownership dreams, who might otherwise be locked out of the market due to rising house prices and stagnant wages.
While it’s important to be aware of the potential downsides, the Bank of Mum and Dad can be a valuable resource for first-time buyers in the UK. Whether it’s through gifting, lending, or simply offering guidance, the support of family can make all the difference in navigating the complex world of mortgages and property purchases.
But remember, it’s not the only option out there. With a bit of research and careful planning, you can find alternative routes to homeownership that work for you, whether that’s through government schemes, shared ownership, or other innovative solutions.
No matter which path you choose, the journey to owning your own home can be exciting and rewarding. With the right information and support, you can make informed decisions and take those first steps towards your dream home.