What Is The Bank Of Mum & Dad?
The Bank of Mum and Dad is a phrase used to express money lent to children by their parents.
In recent news, Legal and General claim that The Bank of Mum and Dad is equivalent to the size of a Top 10 Mortgage Lender in the UK, set to “lend” over £5bn in 2016. The reason for the inverted commas around “lend” is that the majority of Banks and Building Societies do not accept any sort of loan towards a deposit for a house, be that from your parents or anyone else. In fact, the donor of the gift will have to sign a letter addressed to the Bank to confirm that the funds are a non-refundable gift and they expect no repayment at all.
In that way, Legal and General’s story was slightly misrepresented, when it comes to mortgages the Bank of Mum and Dad is no such thing – it’s the Charity of Mum and Dad! To be fair, some Lenders will accept a loan from parents towards deposit but the expected monthly repayment must be built into the affordability calculator. The report went on to say that the funds of parents will be involved in a massive 25% of mortgage transactions this year and that the average gift will be £17,500.
In practical terms, there are a few other different ways in which the Bank of Mum and Dad may help you onto the property ladder (or indeed move up it):
- Guarantor Mortgages
- Offsetting Savings
- Family Discounted Purchases
A Guarantor Mortgage is one where someone else (typically a parent) has their own personal income assessed when their son or daughter applies for a mortgage. They become the “back up” in case you cannot afford to pay. The idea behind this is that it could allow you to borrow more than you would otherwise have been allowed. In practice, though Guarantor Mortgage quite often works out not to be the answer. Firstly, Guarantor Mortgages are not a way around getting a mortgage if you have bad credit, they are designed to grant a bigger mortgage to someone who already qualifies for one.
The main applicant may have to demonstrate that there is a “succession plan” in place, that is to say how they think they will be able to sustain the mortgage in their own right in the future. A good example of this might be a Trainee Professional who is expected to get scheduled pay increases. The Lenders do not like it when the mortgage is due to run past the Guarantors retirement age (just in case your succession plan does not come to fruition) so if your family member is in receipt of a guaranteed income such as a pension that could help. An alternative to a Guarantor Mortgage would be simply to do a joint application with your family member with a view to remortgaging the property into your sole name in years to come.
Mortgage products may be available to you which allow your parents or family members to offset some of their savings against your mortgage. Some parents find this preferable to tying up their cash in your bricks and mortar. The way these can work is for the family member to deposit some cash in a savings account with the Mortgage Lender and there it must remain until certain conditions are met. These savings may or may not attract interest whilst the funds are sitting there.
Family Discounted Purchases
Also known as “Sale at undervalue”, this is where a family member sells you a property for less than the open-market value. Some Lenders will treat the amount of the discount as essentially a gifted deposit which means that this is one of the few situations where you won’t necessarily need to put down any deposit of your own. If the discount is substantial (for example 25% or more of the open market value) then this will really help you as you may qualify for some of the lowest mortgage rates available.
I have come across this type of scenario hundreds of times over the years, it can occur when a parent has more than one property and wants to help one of their children onto the ladder. A not dissimilar situation can occur when a family member dies and leaves a property to you as an inheritance. Sometimes one sibling wants to retain ownership of the property and the other would prefer the cash. In that example, you can potentially raise money against the property to buy out the interest of the other family member so that you eventually you own the property outright.
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