Bank of Mum and Dad: when family help becomes part of the mortgage application
A BBC report examining the unequal financial help parents give their adult children has put a familiar feature of the housing market back in focus: the Bank of Mum and Dad can transform a first-time buyer's prospects, but family money also needs to be handled properly when it becomes part of a mortgage application.
For some buyers, parental help is what finally closes the gap between renting and buying.
An additional contribution towards the deposit can reduce the amount that needs to be borrowed, lower the property's loan-to-value ratio and potentially open up a wider range of mortgage products.
But from a lender's point of view, £20,000 transferred by a parent is not simply another £20,000 in the buyer's savings account.
The lender and conveyancer need to understand where the money came from, whether it has to be repaid and whether the person providing it expects any ownership or legal interest in the property.
That means one of the first questions families need to answer is deceptively simple:
Is the money a gift or a loan?
What is a gifted mortgage deposit?
A genuine gifted deposit is normally money given to the buyer without an expectation that it will be repaid.
The person giving the money would not normally acquire an ownership interest in the property simply because they contributed towards the deposit.
Many mortgage lenders accept family gifts, particularly from parents and close relatives, but they will normally want the arrangement documented.
Our guide to gifted deposits for first-time buyers explains the checks in more detail.
Depending on the lender and circumstances, the person providing the money may be asked to provide:
- a gifted-deposit letter or declaration;
- proof of identity;
- evidence of their relationship to the buyer;
- bank statements;
- evidence showing where the money originated; and
- confirmation that repayment is not expected.
These are not unusual signs that something has gone wrong with the application.
They form part of the lender's and conveyancer's obligation to understand the source of the purchase funds and carry out anti-money-laundering checks.
A family loan is different from a gift
Problems can arise when families use the word "gift" rather loosely.
A parent may say:
"I'll give you £25,000 for the deposit, but you can pay me back when you're earning more."
From a family perspective, that may feel like help.
From a mortgage perspective, however, it is potentially a loan rather than a gift.
If repayment is expected — whether through monthly payments, a future lump sum, proceeds from an eventual sale or simply an informal understanding — the lender needs to know.
That is because repayment could affect the buyer's finances.
Mortgage lenders assess income alongside debts, expenditure and other financial commitments when deciding how much someone can borrow.
A £300 monthly commitment to repay a parent may therefore be relevant to affordability in much the same way as another regular financial obligation.
The lender may also need to understand whether the parent expects security over the property or has any competing claim to the sale proceeds.
Different lenders have different criteria for family loans and gifted deposits.
The important point is transparency.
Money that is expected to be repaid should not be presented to the lender as an unconditional gift.
Why pretending a loan is a gift can cause problems
It can be tempting for a family to regard the distinction as paperwork.
It is more important than that.
A mortgage lender makes its decision based on the financial information supplied by the applicant.
If an apparent gift actually comes with a repayment agreement or ownership expectation that was not disclosed, the lender may have assessed the application on an inaccurate picture of the buyer's finances.
The safest approach is therefore to establish the arrangement before submitting the mortgage application.
The buyer, parent, mortgage adviser and conveyancer should all be working from the same understanding.
Why a larger family deposit can make a difference
Family assistance can nevertheless have a substantial effect on a mortgage application.
Suppose a first-time buyer wants to purchase a £250,000 property.
With £12,500 available, they have a 5% deposit and need a 95% loan-to-value mortgage.
If their parents genuinely gift another £12,500, the deposit becomes £25,000 and the mortgage requirement falls to 90% LTV.
That move from one LTV band to another can potentially affect:
- the number of lenders available;
- mortgage rates;
- product choice;
- monthly repayments; and
- the lender's overall view of risk.
Our guide to loan-to-value and why it matters explains why relatively small changes in deposit size can sometimes have a disproportionate impact on the mortgage options available.
However, a larger deposit does not override affordability.
A buyer can have a substantial family-funded deposit and still fail a lender's affordability assessment if income is insufficient or other financial commitments are too high.
Family help can come with emotional expectations too
The difficult part of the Bank of Mum and Dad is that family money is rarely just money.
One parent may genuinely regard the contribution as a gift.
Another may think of it as an advance on an inheritance.
Another may quietly expect the money to come back when the property is eventually sold.
Parents may also want to protect their contribution if their son or daughter is buying with a partner and the relationship later breaks down.
Those expectations need to be discussed before the money moves.
Otherwise, two people can have completely different understandings of the same £30,000 transfer.
For example:
Parent: "We lent you the deposit."
Buyer: "You said it was a gift."
That disagreement is difficult enough within a family. It becomes significantly more serious when the mortgage application and legal ownership of a property have been structured on the assumption that the money was an unconditional gift.
What if parents want their contribution protected?
Parents sometimes want legal protection for money contributed towards a purchase.
That can become particularly relevant where:
- one partner contributes substantially more than the other;
- parents are providing a very large part of the deposit;
- siblings have received different levels of support;
- the parents expect repayment eventually; or
- there is concern about what happens if the couple separate.
A solicitor may discuss possible legal arrangements, which can include agreements dealing with beneficial ownership or the distribution of sale proceeds.
However, families should not assume they can tell the mortgage lender the money is an unconditional gift and separately create an arrangement that effectively gives the donor repayment or ownership rights.
Some lenders specifically require a gifted deposit to be non-repayable and to give the donor no interest in the property. Lender requirements can differ, so any proposed legal protection should be discussed with the conveyancer and mortgage adviser before the mortgage is arranged.
Independent legal advice may also be sensible for the parent and buyer where substantial sums or ownership rights are involved.
A gifted deposit isn't the only way parents can help
Parents who want to help do not necessarily have to give money away permanently.
Depending on the circumstances and lender, family assistance can potentially take other forms.
These may include:
- guarantor-style mortgages;
- Joint Borrower Sole Proprietor arrangements;
- family-assisted mortgage products;
- savings used as security; or
- other specialist family-support products.
These structures can solve different problems.
A gifted deposit primarily strengthens the buyer's deposit.
A Joint Borrower Sole Proprietor arrangement may instead allow another person's income to support affordability while the buyer remains the property's owner.
A guarantor arrangement can expose the supporting family member to financ
