Ask Adam: Help! Should I open the Bank of Mum and Dad to help my daughter buy her first home?

Hi Adam, 

‍I’m in a bit of a pinch. My 22-year-old daughter wants to get onto the property ladder in a few years’ time. I know how hard it is for her generation to get their first home with prices skyrocketing. What are my options? Is it time for me to open The Bank of Mum and Dad piggy bank? 

Thanks, 

Samantha  
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Hey Samantha, 

Great question. It can be a little scary considering how much housing prices have increased over the years. As it stands the average property in the UK is 10x the average salary. Ouch!

The Bank of Mum and Dad is becoming a much more common port of call for first-time buyers. According to Legal & General, in October 2020, 49% of first-time buyers aged under 35 were helped by the Bank of Mum and Dad to buy property. 

As much as two-thirds of these buyers (65%) said they would not have been able to buy without that help. Without it, they would have had to delay by five years. What’s more, in 2020, the Bank of Mum and Dad was lending on average £20,000. Take a note Banks!

But what are some of the options for you and your daughter? 

The first place we can start is with a Lifetime ISA ("LISA"). The government created LISAs to help young people get onto the property ladder. 

With a Lifetime ISA, you can put up in up to £4,000 a year. On top of this, the government also adds a 25% bonus each year on top. Wahoo! 

If your daughter hasn’t opened a Lifetime ISA yet, the best thing to do is to open one as soon as possible. Because if she were to put  £4000 into each year for 7 years, the government add an extra £7,000. So she would have around £37,000. 

So at age 29, your daughter would have £37,000 she could put towards a deposit on a mortgage. This might not be enough on its own, but it could make a big difference in getting a mortgage. It would also mean that you might not need to give as much money to help your daughter to get her first home. It is worth remembering though that you can only withdraw the money from a LISA if the property price is less than £450,000. So if your daughter lives in London, then make sure you keep this in mind as there are penalties to withdraw the money if the property is over £450,000.
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This brings us to the option of loaning money to your daughter. Now, this could either be some of the deposit or the whole amount. This can be risky as once you’ve handed over the money there is no guarantee you’ll get it back. If you do decide to loan the money to your daughter, you'll want to understand her financial situation. You should start by having a conversation about her income and outgoings. This way you'll be best informed to decide whether she could be expected to pay you back the loan. 

The best part about loaning the money to your daughter is that you don’t have to charge her interest as a bank would. Although you don’t need to charge interest, it is sensible to have a written agreement. It should make it clear how much will be loaned, how much is expected to be paid back, and when. This doesn’t need to be complex and a simple agreement will be fine. There are plenty of templates which you can find online, such as this one.  

If your daughter is buying a home with her partner, you may want to put in some safeguards. For instance, write into the agreement that her partner must pay back the loan, should anything happen.  You can also cover this in the deeds of the home in what is called a ‘Declaration of Trust’. In a Declaration of Trust you can set out that the money you gave to help will come back to you should anything happen. 

Another option is to become a guarantor for your daughter. As a guarantor for your daughter, you'll be expected to cover the mortgage payments in the event your daughter can’t. The bank may also look at your savings and home and use this as security to cover any payments not made. Being a guarantor is not a decision to take lightly.  But, if you're confident your daughter can repay the mortgage, then it can be a really useful way to help secure a mortgage. 

A similar alternative is to take out a mortgage with your daughter as a joint borrower. Banks now offer Joint Borrower, Sole Proprietor Mortgages. This increases the amount that the buyer could afford. This type of mortgage is useful for those on lower salaries and could allow your daughter to afford a property which she wouldn't be able to buy herself.

Having your income on a mortgage application makes lenders more willing to agree to a bigger mortgage and will reduce the amount of deposit required. This does mean that you’re on the hook for the mortgage payments if your daughter cannot pay. But by not being on the mortgage deed, you don’t have to worry about paying extra Stamp Duty tax. Nice!

The final option, if possible, is to buy the property outright for your daughter. A drawback to this option is that you will be liable to pay an extra Stamp Duty charge because you would be buying, presumably, a second property. On second homes, the government charges an extra 3%. This means if you bought a flat for your daughter worth £296,000 then you’d end up paying £11,180. Whereas if she bought this in her own name, there would be no stamp duty to pay as a first-time buyer.

From a LISA to loaning the money or acting as a guarantor, I hope I’ve given you a better idea of the options available to help your daughter get her first home.

Wishing you the best of luck, 
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Adam
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Disclaimer: We’re an investment app, so your money is at risk and can go up or down. This blog isn’t our advice, so please don’t change your plans or buy or sell any of your investments based on it. We don’t know your money situation, your plans for the future or how much experience you’ve got. If you’re unsure you should speak to a professional financial advisor.