In our first episode of Make Your Move, reallymoving’s homebuying podcast, we discussed this topic at length. We explored the intricacies of each option offered, as well as how well they work for people.
What is the Bank of Mum and Dad?
The Bank of Mum and Dad is when parents help their children buy a property by giving them money. Of course, it isn’t an official loan and can be given in different ways. Parents can decide to transfer a lump sum as a gifted deposit, or they can send money gradually. They can also do something like 'springboarding' which uses their home as collateral for their child's home.
The bank of mum and dad is a catch all phrase for receiving financial help towards your first home. Often, it's in the shape of a gifted deposit.
Why do people use the Bank of Mum and Dad?
The Bank of Mum and Dad is a helping hand. Buying a property can be difficult. This is because it's often hard to save money to get on the ladder if you haven't built equity. Once you buy a home, earn interest, and then sell the property, moving up the ladder will become far simpler.
This is even more true now than it was in previous years.
Deposits in the UK currently stand at an average of £61,000. In London, this is more than doubled to £116,000. To give some perspective on how high those property prices are, 30 years ago, a property only cost £60,000 on average.
This is only £1,000 below what buyers are now expected to save for a deposit alone.
Mortgage rates aren't much better. Whether you're looking to buy a house or a flat, things have clearly changed. Buying a property is hard to achieve on your own, let alone with rising inflation.
As the private rental sector’s rates increase, saving for a deposit this high can feel near impossible. Because of this, many people seek financial support from their parents, either through gifts or support.
What forgotten costs are there when looking at home buying affordability?
When you buy a new property, the initial costs typically include:
These costs can vary depending on your circumstances. For example, Stamp Duty is currently only charged on property purchases over £300,000 for First Time Buyers. And to an extent, it’s possible to shop around to find the best price on costs like solicitor’s fees. However, the largest of these costs – the property deposit – is one that more people are finding difficult to save for.
If you're not sure how much you should be saving for your move, our moving cost calculator will work it out for you.
How big a deposit do you need?
The days of lenders offering 100 per cent mortgages are long gone. That means that if you want to buy a property, you will have to put down a deposit of at least 5% of the purchase price. However, if you can pull together a deposit of 15% to 20% or more, you may find that you qualify for better mortgage deals.
We recommend talking to experts like the Mortgage Advice Bureau. They can help you work out what you can afford.
So, who uses the Bank of Mum and Dad?
Whether or not you plan to use the Bank of Mum and Dad, it may surprise you how many people do. In 2020, one in two house purchases from under-35s were done with support from parents.
Many of these homeowners were likely First Time Buyers. Data from reallymoving shows that, on average, people are buying their first home when they're 34 years old.
The fact that half of home purchases are made with the financial aid of parents is rather significant. But it can be unclear how much these parents are contributing to a purchase. Zoopla’s data suggests that it averages out at nearly £32,000. By the end of 2023, UK parents are expected to have paid £17 billion to help their children purchase a home.
So, in theory, just as many people use the Bank of Mum and Dad as people who don’t. However, this doesn’t mean that all gifting or loaning families are able to support with the same amount. There have been concerns that the entire concept of the Bank of Mum and Dad stokes inequality.
Parents who are more likely to have significant wealth are more likely to gift heavier amounts to their children. Nearly half (46%) of their children get a substantial financial gift to buy a property. In comparison, only 18% of the children of renters also get that support. An ‘inheritocracy’ could be at play here, leaving those with financially less secure families unable to get the support they want.
‘Inheritocracy’, a newly coined term, suggests that there is a certain wealthy group of families with a financial advantage. This allows them to buy their children properties with greater ease. The lack of equality on this front can leave a lot of young people feeling deflated.
Financial aid isn't the only way for parents to help children in purchasing. It also doesn’t mean that First Time Buyers have no hope of buying without any financial support from the family. There are several schemes and mortgage deals worth considering too.
How can you use the Bank of Mum and Dad?
As we mentioned before, getting help from parents doesn't mean receiving a large amount of money.
But if you and your family want to do this, it is one of the simpler ways of making use of the Bank of Mum and Dad. However, you can’t just transfer £30,000 into another account, and will need to complete an official gifted deposit letter.
Gifted deposits
A gifted deposit allows for a large sum of money to be transferred for the purpose of buying a property. All you need to do is fill out a gifted deposit letter to give to your mortgage lender. This is to make sure that there’s no money laundering at play.
Inheritance tax must be paid if the person who gives the gift dies within 7 years. It must also be paid if the property is worth more than £325,000.
For both parties, it is best to be open and clear about the arrangement. Is the sum of money a gift or is it a loan? If it is a loan, is there a formal or informal agreement about how and when it will be repaid? If it is a gift, have both parties acknowledged that there will be no repayment?
Be aware, if it's a loan, mortgage lenders are likely to be more wary, because there's another amount you're paying back alongside your mortgage. If it's a private agreement between you and your family, with an amount paid back monthly, or you're going to pay it back when you sell, keep in mind that this might impact your mortgage.
Alternatively, if you are considering buying a property with extended family or friends, you can read our article on buying a house with friends.
Joint mortgage
Your parents may have financial security and excellent credit history, but that doesn’t mean they’re able or willing to transfer a large financial gift. But they may still want to help you.
A joint mortgage allows for a combination of incomes to pay towards a mortgage. This is an excellent way to alleviate the burden of a mortgage and deposit for First Time Buyers.
Keep in mind that if your parents already own a home, you won't get the First Time Buyer Stamp Duty discount with a joint mortgage. Your parents will also need to pay more in Stamp Duty as this property will be considered a second home.
Springboard mortgage
Much like a guarantor mortgage, a springboard mortgage is similar to a joint mortgage but doesn’t require a bank transfer. This can make it more attractive to those who don’t have the means or desire to pay a lot of money all at once.
All a family springboard mortgage requires is your parent’s credibility. Your mortgage broker will accept your parents' savings or a chunk of their equity as a safety net. If you're unable to meet mortgage repayments, the value of the savings or equity can subsidise outstanding repayments. Once this is done, there will be no need for a deposit at all.
Different banks offer different versions of this springboard mortgages. It’s worth doing your research to find the best one for you.
How to buy without the Bank of Mum and Dad?
Perhaps you’re not in a situation where parents are able to financially aid you or lend their credibility. But, as promised, this doesn’t leave you in the property dust.
Lifetime ISA
Lifetime ISAs are a particular favourite of ours. From the ages of 18 to 40, you’re able to open this savings account. From there, you can put in up to £4,000 a year.
The government will then add another 25% of what you’ve contributed that year. It’s essentially free money.
You can open a Lifetime ISA with just £1 and it’s specifically built for First Time Buyers. There are restrictions on when you can withdraw the funds. However, if you are using the money for your initial property purchase, it should not pose any issues.
Shared ownership
Shared ownership is an excellent option for homebuying as it significantly reduces your deposit cost. Instead of buying a whole property, you can instead purchase a share in it. This means you’ll partially own it and pay rent on the rest.
You can sometimes have the option of buying a larger share of the property over time. This is called staircasing and can decrease the expense of your repayments.
To get the full extent of ‘Let’s be real about the Bank of Mum and Dad’ and other great topics for First Time Buyers, take a listen to Make Your Move on all major platforms!
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