Buying a house with your parents’ money

Buying a house with your parents’ money

Saving a deposit for a property has arguably never been harder.

Indeed, it’s estimated that as many as 56% of all first-time buyers under the age of 35 have financial help from their parents to buy a property.

And although the pandemic saw many first-timers saving more and funding their property purchases without support from the ‘Bank of Mum and Dad’, gifted deposits and other financial help from parents remains an option for many.

Here, we’ll explain how gifted deposits work, outline the things both parent and child will need to consider and explain the tax implications…

 

Can I buy a house with my parents’ money?

It’s possible for parents to help their children on to the property ladder by providing money to boost their deposit.

Gifting or loaning money for their deposit is the most common way parents can help, although there are pros and cons for both.

 

How gifted deposits work

The first point to make absolutely clear when it comes to gifted deposits is that they are exactly that: A gift.

A gifted deposit is when someone, who is usually a parent, or other family member, gives a buyer a sum of money to be used towards a deposit on a home.

Many buyers use gifted deposits as a way to bring their deposit amount up to obtain better mortgage rates and open up the type of lenders they can approach for a mortgage.

While there are many ways a parent or family member can help a buyer get on the ladder, a gifted deposit is generally considered the simplest way.

 

The pros and cons of gifting a deposit

Pros

Cons

Providing the parent gifting the deposit lives for seven years after the gift is made, it will be tax free

Some mortgage lenders don’t accept gifted deposits

A larger deposit means lower mortgage repayments

Mortgage lenders, estate agents and solicitors could require proof of funds for a gifted deposit

A bigger deposit could mean being able to buy a larger, or more expensive property in a better area

Gifted deposits can sometimes cause friction, with parents wanting to have a say in their child’s purchase

Because a larger deposit could reduce the loan to value, meaning more mortgages to choose from

Gifting could leave the parents short of cash in the future

 

How much can my parents give me to buy a house?

Your parents can gift you as much as they like to help with your deposit.

However, there are some tax implications to consider before gifting.

Anyone can gift up to £3,000 every year without any inheritance tax being due.

That amount can also be carried over from the previous year, so if you haven’t gifted any money for two years, each parent could hand over £6,000 each to a child to help with their deposit and face no tax liability.

 

Do you have to pay tax on a gifted deposit?

If you decide to gift your child more than the £3,000 per year tax free allowance, or you’ve already used up some, or all of your annual allowance, your child may have to pay inheritance tax.

Inheritance tax, however, would only be due if the person gifting the money was to die within seven years and their total estate, including the gift, was worth more than £325,000.

Any amount above £325,000 would be liable for inheritance tax at a decreasing rate over time:

 

Time elapsed between gift and death

Inheritance tax rate

Less than three years

40%

Three years

32%

Four years

24%

Five years

16%

Six years

8%

Seven years or more

0%

 

Gifting money for house deposits – what parents need to consider

There are a whole host of considerations parents need to make before gifting their children money for a house deposit…

 

1. Mortgage lender rules

Most mortgage lenders have rules around gifted deposits and some stipulate who is permitted to ‘gift’.

Family members are usually fine, but distant relatives or friends aren't always allowed to gift in the eyes of the mortgage lender.

Before accepting a gifted deposit, check with mortgage lenders, or your mortgage broker, what rules are in place.

 

2. Proof the money is a gift

Many lenders will require the person handing over the money to make a written statement confirming the money is a gift and doesn't need to be paid back.

If you do have to pay back any gift then it's not a gift at all - it's a loan.

And this will be seen as such by the mortgage lender who may not allow it, or may reduce the amount they are willing to lend.

Some lenders choose to add the loaned amount on to the mortgage, increasing monthly repayments and this could also affect affordability stress tests.

 

3. Rights to property

The person gifting the deposit may also be asked by the mortgage lender to confirm if they are to own any equity or interest in the property being purchased.

This could mean they have to sign a further declaration stating they relinquish any legal hold on the property.

 

4. Gifted deposits and solicitors

Property solicitors and conveyancers are obligated to perform money laundering checks during property purchases.

So, with that in mind they usually require more detail on gifted deposits.

Usually this will include the gifter's full name and identification, as well as bank statements and details about how the money was earned.

 

Other ways parents can help their children buy a house

Gifted deposits aren’t the only way parents can help their children buy a property.

Other options include…

 

1. A loan

If the parents can’t afford to gift their children money to buy a house, or the option simply doesn’t work for them, they could consider loaning them money.

Any loan would require a legal agreement stipulating the terms of the loan, when it will be repaid and any interest due, as well as what happens should the person loaning the money die before it’s paid back.

Loan deposits also need to be declared to mortgage lenders, who will add the loan to the child’s outgoings.

This could affect the amount they’re able to borrow, while some lenders may not accept a loaned deposit at all.

 

2. A guarantor mortgage

Like a rent guarantor, parents can also act as a mortgage guarantor for their children.

This sees their income or assets included alongside the buyer's when obtaining a mortgage, but means they are also liable for missed mortgage payments if they occur.

 

3. A joint mortgage

A parent's income or assets can be used alongside the buyer’s to increase borrowing potential, but unlike a guarantor mortgage the parent would own a stake in the property.

 

4. A remortgage

Some parents choose to remortgage their own property to release equity to gift to their children as a deposit.

This is not without its risk, however, and should be discussed with an independent financial advisor.

 

Further reading…