Forget Lloyds and Barclays, recently a new name in banking has grown in influence and is now one of the biggest lenders to would-be home owners.
It is known as BOMAD but it is not a new darling of the High Street or a big player on the City’s money markets. Instead, it is an acronym for Bank Of Mum And Dad and represents money handed over by parents to children trying to get onto the housing ladder.
According to the Centre of Economics and Business Research, 300,000 buyers were helped by a family member last year and around £77bn of property purchases were underpinned by BOMAD – making it the equivalent of a Top 10 mortgage lender.
Thirty-five per cent of first-time buyers ask parents for financial help and, on average, those parents who do contribute to a deposit hand over £17,500.
Fifty-seven 57% of BOMAD contributions are gifts, while 18% are no-interest loans and a further 5% are loans with interest.
This is, however, a grey area, because with most lenders, parents are not allowed to make their contribution in the form of a business loan, it has to be a gift.
This is because there is less incentive for borrowers to keep up their repayments because they are not risking their own money and it also means that the parents have a stake in the house – making it harder for banks to repossess a home if the children default.
This is why buyers who have borrowed from parents must provide a gifted deposit letter stating that they have no financial interest in the property.
In many cases, all of this is straightforward. Often, children find a nice way to ask for an advance on their inheritance while some parents offer the money, realising that it is the only way they will get their children to leave the family home!
There are alternatives, not least via one lender in the market who will offer a mortgage to buyers who can get an unsecured loan through another company. Otherwise you can get:
- A parental guarantor mortgage – where parents guarantee the debt and have to cover a missed payment if their child defaults;
- Family offset mortgages – parents put savings into an account linked to their child’s mortgage and the money is deducted from the mortgage to lower repayments.
- Family deposit mortgages – a family member puts money into a savings account, which is held as security so that if the buyer defaults, the bank dips into the savings account.
As with all financial products, there are risks involved and so it is always advisable to seek professional advice before deciding which mortgage to choose, so contact us or click the button below and one of our team will ring you back.