Bank of Mum and Dad (BOMAD) can use second charge to fund home deposits

By Marie Grundy, Managing Director, Second Charge Mortgages, West One Loans

Gifting or lending money to family members so they can buy their own home is not new but it is more prevalent than it used to be. We even have a name for it now - the Bank of Mum and Dad (BOMAD) – although it is often also grandparents offering a helping hand.

If BOMAD was actually a bank it would be a top 10 lender. According to research by Legal & General and Cebr, 23% of home purchases in 2020 had family assistance, up from 19 per cent in 2019.

With house prices continuing to rise, people’s hopes of becoming a homeowner are moving further away from their grasp. The average deposit paid by a first-time buyer in 2020 rose 13% to £57,278, up from £46,449 the year before, according to the Halifax.

So, it is not surprising that the L&G research highlighted financial assistance was likely to increase. One in three people looking to buy in the next five years (33 per cent) said they will have to rely on family or friends.

If people are lucky enough to have parents who can afford to help them, all well and good but many are not in that situation. Others are asset rich and cash poor and would like to help but don’t think they can.

One way to raise finance for a gifted deposit is to remortgage and take more money out of the property but that is not always possible.

The pandemic has made it more challenging for some borrowers to access high street mortgages and age could be a factor if approaching retirement. Remortgaging could also incur costs for borrowers including early repayment charges.

But there is another option. Homeowners who have a mortgage and can afford to make monthly repayments on another loan can take a second charge mortgage. This can be used to put towards a deposit for a family member to buy a home.

We are also seeing people who would rather give their children money now so they can set up home rather than leaving it to them years down the line as inheritance.  At the end of last year, we introduced criteria to support a second charge mortgage specifically aimed at the Bank of Mum and Dad.

Intermediaries might not be aware that a second charge can be used for this purpose but increasingly people are using this type of finance to buy property.

Parents don’t have to provide the whole deposit, they could just contribute to it if their children already have some savings. This is a good way for home buyers to increase their deposit in order to bring down the LTV and secure a better rate.

Due to the nature of specialist lending, second charge mortgage lenders will underwrite each case manually and carry out an in-depth assessment of an individual or couple’s circumstances.

We always assess affordability and would not finance the Bank of Mum and Dad if parents or grandparents were not in a position to repay the loan.

Second charge is a great way to help family members get onto the property ladder and finance can be made available quickly. If it wasn’t for the support of BOMAD, far fewer homes would be bought by first-time buyers.