Buying a home with parents help

The ultimate guide to buying a home with parents help. Learn all the tips and tricks for buying a home with parents help.

The Office for National Statistics reported that UK house prices fell in November 2022 for the first time in more than a year. House prices dipped 0.3%, the first decline since October 2021; this brought the annual growth rate to 10.3 %. The average UK house price in November was £295,000.

House prices are forecast to fall by 10% in 2023 according to Savills, others expect property price declines of between 5% and 12%. Some warn that in a worst-case scenario, they could crash by 15% to 20%.

At the same time, prevailing economic conditions alongside Kwasi Kwarteng’s disastrous mini-budget in September have sent mortgage rates rocketing from 1-2% to above 4%, a level last seen in 2008.

So, houses could be cheaper to buy in 2023, but funding with mortgages will be more expensive.

How much can you borrow?

Mortgage affordability is the term used when lenders assess whether you can afford the monthly repayments. They take into account multiple factors such as age, job type, how much you earn, your credit history, and how much you spend every month. They will then look at the total amount you are borrowing to work out whether you can afford to pay it back at the current rate, and if rates were to increase in the future.

To ensure the best possible chance of obtaining mortgage approval, check your credit report before starting the application process. Make sure there is no incorrect information, as any discrepancies no matter how small can adversely affect your mortgage application.

Assuming you pass the affordability checks, most lenders allow you to borrow between 4.5 and 5.5 times your annual salary. That means if you earn £30,000, you may be able to get a mortgage of around £150,000.

Taking out a joint mortgage could increase the amount you can borrow. You would still have to pass the affordability check and the multiple is usually less than for an individual, say 3.5 to 4.5 times the joint annual salary. That means if you both earn £30,000, you may be able to get a mortgage of around £240,000.

You should also try and save as big a deposit as possible. The lower your loan to value LTV, the lower the interest rate charged by the mortgage provider. For example, on a house costing £200,000 for a 3 year fixed mortgage, The Nationwide Building Society offers the following rates:

The cost of living crisis is making it harder to save the big deposits needed and while salaries remain flat, the mortgage multiplier is not enough to bridge the gap. House prices remain out of reach for most.

Clearly, the need for family support for first-time buyers is increasing. Enter the bank of mum and dad!

Buying a home with parents help

There are several ways that parents can help buy a home. Some parents may be lucky enough to have savings or excess income that they are able to gift or loan. This can be used to boost the mortgage deposit either directly or indirectly through a LISA (There are some inheritance tax implications to consider before gifting).

As well as through loaning or gifting towards deposits, there has been an increase in parents being involved in the mortgage process, from naming parents as a guarantor on a mortgage, using a parent's income to boost the borrowed amount, or utilising a parents savings to offset monthly repayments. We cover some of the popular options below.

Buyer Beware!

There are thousands of mortgages on the market and not all conform to the exact details laid out below. Many providers add their own particular stipulations and have different rules and regulations. It can be very confusing!

Talk to a mortgage broker early on in the process. These mortgages often involve complex arrangements, and they can help find the best solution for everyone involved.

Joint borrower sole proprietor mortgage (JBSP)

With a joint borrower sole proprietor mortgage, the income of parents, or even a friend, can be used on the mortgage application. This boosts the amount you can borrow and the parent's name is not on the deeds of the property, which means no stamp duty for a first-time buyer.

There is also no legal provision for the joint borrower to benefit from any price increase of the property when it comes to be sold.

This is a temporary form of support, once the mortgage becomes affordable, the parent can be removed from the arrangement.

While the parent does not need to contribute to the monthly payments, they would be expected to step in if you were not able to afford them, and if either party experiences financial difficulties that lead to credit issues, this would impact the other’s creditworthiness too.

Many JBSPs have an age weighting; if one of the applicants is over 60, the monthly repayments would become more expensive, or the term made shorter which can increase the monthly payment amount.

Most lenders providing JBSP mortgages offer this option across their product range so there is plenty of choice and you don’t pay a premium on the rate.

Guarantor mortgages

A guarantor mortgage is where a parent acts as a guarantor for 100% of the mortgage debt, essentially agreeing to cover the mortgage payments if you fail to do so. Guarantor mortgages can use the parent's home or savings as security.

Property as security: If nothing goes wrong, it shouldn’t cost anything, but if you are unable to keep up with repayments and default on the mortgage, the parent would be liable for a portion of the loan. This could put the parent's home at risk.

Savings as security: The parent deposits usually 10-20% of the loan size into a special savings account and this money is held as security for a certain number of years, or until the amount remaining on the mortgage falls below a certain percentage of the property's value.

This type of mortgage has the big advantage that it allows a buyer to borrow up to 100% of a property’s value while the guarantor can still receive interest on their savings.

However, during the period that the savings are locked away, the guarantor does not have access to them, and this money is in danger if you default on the mortgage. Also, mortgage interest rates may be higher than traditional mortgages.

Family offset mortgages

These mortgages involve parents using their savings to be offset against the mortgage as a way of reducing the amount of interest you pay. This means that the interest payments will be smaller, potentially making it easier to pass the lender's affordability checks.

For example, if you take out a mortgage for £200,000 at 3% interest with £30,000 already tucked away in a savings account, by offsetting these savings against the full mortgage amount, you will only actually have to pay interest on a total of £170,000.

Unlike a guarantor mortgage, savings can be added to or removed from a savings account as and when they are needed. This makes things more flexible and reduces any potential friction within the family.

The downside is that there are a limited number of offset mortgages available, and the interest rate is often much higher. Added to this, the savings do not receive any interest which was not as much of a problem when interest rates were at historic lows, but there is significant opportunity cost now, and that is before you consider potential investment returns missed out on.

Joint mortgage

You could take out a joint mortgage with your parents, making both equally liable for the repayment of the loan. The upside is that with your combined incomes, you may be able to afford to take on a larger loan.

The big drawback to this plan is the additional stamp duty. If the parents already own a property, then the new home would count as a second home. This means there would be an additional 3% stamp duty due, which could make the property significantly more expensive. Plus, when the property is sold, there may be capital gains tax (CGT) liabilities.

Some lenders will let you take on a joint mortgage without the parent's name added to the property’s title deeds, allowing you to sidestep these tax problems.

Tenants in common

Tenants in common is typically a legal arrangement made between two buyers at the conveyancing stage, rather than a specific mortgage. It acknowledges in a legal document that each party has contributed to the deposit so that any future equity will be distributed fairly.

This arrangement sees the parent being named on the deeds, as each borrower has a separate share in the property. This is very useful where parents and child, or even friends plan to live together, as the funds are legally separate from each other and the risk of financial loss is much lower.

There are additional legal costs involved in setting up this type of arrangement, and it can be problematic in the future if one owner wants to sell up and the other does not.

A different variation of tenants in common is 'dynamic homeownership'. This allows parents or friends to buy together and track their contributions so the equity in the home is eventually split depending on their initial investment and the amount they contribute on a monthly basis.

Talk to a mortgage broker early on in the process. These mortgages often involve complex arrangements, and they can help find the best solution for everyone involved.