Can my parents help me with my first mortgage?

The short answer is: Yes. There are several effective ways parents can help their children buy their first home. They are:

• Contributing towards monthly mortgage repayments

• Acting as mortgage guarantors 

• Providing an upfront lump sum to help with a house deposit

• Surplus income gifts

• Equity release 

We’ll go into each in more detail and break down the pros and cons of each within the context of family members helping first-time buyers.

1. Ways Parents Can Help: Parents can assist their children in purchasing their first home through various means like contributing towards mortgage repayments, acting as guarantors, providing a lump sum for a house deposit, giving surplus income gifts, or opting for equity release.

2. Mortgage Contributions and Tax Considerations: Direct contributions to mortgage repayments should be given as gifts, not loans, to avoid impacting mortgage affordability. Parents can give up to £3,000 per year to their child’s mortgage repayments while staying within the inheritance tax rules.

3. Risks and Benefits of Being a Guarantor: Acting as a guarantor on a mortgage loan means legally covering mortgage payments if the child defaults, which could risk the guarantor's assets and affect their credit score and borrowing ability.

4. Lump Sum Gifts and Inheritance Tax: Large gifts for house deposits can be exempt from inheritance tax if the giver lives for seven years after making the gift, known as 'Potentially Exempt Transfers' (PET). Gifts under £3,000 per year are considered tax-free.

5. Financial Planning and Alternative Support Options: Parents should carefully plan their finances and consider alternatives like government affordability schemes or co-investing in property, to ensure that their support for their child’s home purchase doesn’t jeopardize their own financial stability.

To lower monthly repayments, direct mortgage contributions must be provided as gifts, without any expectation of repayment, rather than in the form of loans. Why? Mortgage lenders could consider this loan as an additional financial burden and may impact affordability as a result.  

To ensure parents stay within the tax ‘boundaries’ of inheritance tax rules, they can give up to £3,000 per year to their child’s mortgage repayments. To learn more about inheritance tax in the context of homeownership support, please speak to your financial adviser.

Being a mortgage guarantor means you, as the guarantor, are legally obligated to cover mortgage payments if your child defaults. This could impact your credit score and financial stability. 

Your assets, possibly including your own home, might also be at risk if they are used as security for the mortgage loan. Additionally, this role could affect your ability to borrow in the future and might bring about potential strain in your family relationships due to the intertwining of financial responsibilities.

Having said that, if you are comfortable with the risks, guarantor mortgages are a popular method to help your child get on the property ladder. Learn more about guarantor mortgages in our dedicated guide.

Larger gifts can potentially be free from Inheritance Tax if you live for seven years after making the gift. These are known as 'Potentially Exempt Transfers' (PET). If you die within seven years and the total value of gifts made is less than the Inheritance Tax threshold, then the value is added to your estate, and any tax due is paid out of the estate.

Again, please speak to your financial adviser before making any significant financial gifts. However, a lump sum given under the annual allowance of £3,000 will be considered a tax-free gift.

Surplus income gifts

Surplus income gifts are useful because they don't have a cap and aren't bound by the seven-year rule. But, there are a few simple rules to keep in mind for these gifts to be free from Inheritance Tax:

1. Make sure these gifts come from your regular income, not your savings

2. They form part of your usual spending – think of them as regular payments you make every month or year (they don’t have to be the same amount each time).

When involving parents in your property purchase, you should consider:

• Structuring loan contracts when relevant

• Understanding inheritance tax responsibilities

• Other taxation issues

Documenting a loan agreement

If your parents are loaning (not gifting) you money for a deposit, for example, ensure a legally binding loan agreement is in place. It should specify interest rates, repayment plans, and other terms to avoid misunderstandings.

However, mortgage lenders usually prefer an outright gift if your parents are giving you money towards a deposit. A loan suggests you have additional financial responsibilities. Lenders assess mortgage affordability based on income and outgoings, including any loan repayments.

Potential tax implications

While there aren't any immediate tax implications upon receiving a financial gift, it can impact your mortgage application. You will need to declare the gift to your mortgage lender, and the lender may require a letter from your parent stating that the gift is indeed a gift and not a loan.

Parents should evaluate their finances to ensure that helping their children doesn’t jeopardise their retirement plans. Here are some top tips to keep in mind:

• Keep up-to-date with the mortgage market

• Always consult with a mortgage broker before you make any decision 

• Always keep an open dialogue and set expectations from the beginning

• Consider implementing a formal agreement for clarity of terms and legal claims

Explore government affordability schemes and co-investing in property as alternative ways to support your child’s home purchase, such as:

• Government affordability Schemes: schemes like Lifetime ISA, Deposit Unlock, Right to Buy, and Shared Ownership offer potential support for first-time homebuyers.

• Co-Investing in property: Joint property investments can be a way to help with mortgages, sharing risks and rewards.