Borrowing a deposit from the Bank of Mum and Dad

Borrowing a deposit from mum and dad needs careful thought.
Borrowing a deposit from mum and dad needs careful thought.
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by Andrew Milnes

Mortgage Advice Bureau, Bingley,

Q. Our daughter is 27 and has been working for the last couple of years with a large insurance firm in Leeds. She has great career prospects and earns a good salary for her age but is currently spending most of it on rent.

My wife and I would much prefer to see her get on the property ladder, rather than paying someone else’s mortgage. However, whilst our daughter would be able to afford the monthly mortgage payment, the issue is finding the deposit.

We can’t afford to give her the money but we could lend her the funds for her deposit. How do we go about this?

A. Great news that you’re in a position to help your daughter, however there are some key elements to consider before the “Bank of Mum and Dad” come to the rescue.

The vast majority of lenders will not allow for a deposit to be borrowed. Instead it must be gifted. In this instance, you would need to provide a letter ratified by a solicitor to confirm that you are providing the deposit monies as a gift and that it is not a loan.

This is for two reasons; firstly, the majority of lenders will want to have first charge on the property and will not want anyone else other than the borrower – in this case, your daughter – to have an interest in the property.

The second is that the lender will factor in the monthly cost of servicing the loan for the deposit into the affordability calculations when working out how much they will advance to the borrower, which means if a lender is happy to accept a deposit which is borrowed, this could negatively affect the amount that your daughter would be able to borrow.

However, over the last few years, a few lenders have recognised this predicament and have launched specific products to help parents or other family members assisting with the funds for the deposit but who aren’t able to gift the amount.

These are generally called “Family Springboard” products, and while the terms vary depending on the individual product, they generally facilitate the person providing the deposit, which in this case would be you and your wife, to “lodge” the deposit monies in an interest-bearing savings account linked to your daughter’s mortgage.

Providing that your daughter makes all her mortgage payments over a pre-determined period of between three to five years then you get your savings back, with interest.

There are also products that allow for the borrower to raise an interest-only loan on their parent’s home to act as a deposit, meaning that the borrower can raise a normal purchase mortgage to sit alongside it.

However, specific criteria apply for both the borrower and the parents or family members who are assisting with the deposit on all of these types of products, and the application process is more complex than a normal purchase mortgage.

This is where sitting down together with a mortgage broker who is experienced in dealing with these types of mortgages can really be helpful. Also, some lenders do still require the borrower to put down a small deposit, for example five per cent, in addition to any funds that their parents or family member are providing, so it’s important to understand the terms of the mortgage that your daughter may want to apply for.

Finally, both you and your wife will need to take legal advice as part of the application process. This should only cost a few hundred pounds.