Five ways lenders can access the Bank of Mum and Dad
It is the lender that keeps on giving. New figures for this year showed that the Bank of Mum and Dad – or BOMAD, the term used to describe financial help given to mortgage applicants by their parents – now helps finance a quarter of all UK mortgage transactions and is expected to contribute a staggering £6.5m this year.
If it was a professional lender, it would be the ninth-biggest lender in terms of money handed over. It has increased the amount of money it contributes from £5.6bn in 2016 and is expected to provide deposits for more than 298,000 mortgages.
According to a report by Legal & General and Cebr, 79% of BOMAD funding goes to people under the age of 30 and 76% of it goes towards the deposit, with just 4% going solely on mortgage payments.
So how can you make the most of your own Bank of Mum and Dad? Or, if you’re a parent looking to help, how can you go about it? Here are five ways to get you started:
Gift/Inheritance Deposit: Gifting a child capital for a mortgage deposit can be the simplest way of helping. Around 57% of parental financial aid for mortgages is gifted.This could also be considered as giving a premature inheritance. Either option omits the complications of arranging a bank loan. However, gifting large sums of money can have complications with inheritance tax. If the benefactor dies within seven years of giving the money, the child will still be obligated to pay inheritance tax on the amount they received.
Unofficial Loan: Parents can loan a set amount for a mortgage informally, to be repaid over a given period. Although most parents merely expect the amount given to be repaid, around 5% opt to loan with interest. Be careful though – mortgage lenders are likely to look upon a loan unfavourably during a financial assessment, as repayments will be considered as an outgoing expense. This may reduce the amount they are willing to lend. In addition to this, most lenders do not like there being an unofficial loan in the background. They are less likely to approve the mortgage if they feel the parents have a financial interest in the property.
Joint Mortgage: This is when a parent buys a property alongside their child. Although the option of joint mortgage is typically limited to parents still working and receiving a regular income. It is especially helpful for children looking to buy a more expensive property, as the parents’ earnings are considered. Generally, up to four people can be named on a mortgage.
Parental Guarantor: Parents can act as a guarantor, meaning that they agree to subsidise their child should they fail to meet their mortgage repayments. This is advantageous if the child has a low credit score, as they can borrow more than they would otherwise. However, you guarantors home may be repossessed if payments are not made.
Family Offset Mortgage: This can be an alternative to giving or lending money directly. Instead, parents can put money into an account. This is then “locked” until a certain amount of the mortgage has been paid. This is generally around 25-30%. The money acts as an offset to the mortgage, so the interest on mortgage repayments is reduced.
Want to find out more? Our advisers can help you decide what option to go for. Contact us for more information on 01332 821 340 or 0800 103 2655, or, alternatively, fill in the form to the right and we will get in touch.