So you’re hoping to borrow a deposit for your new house from The Bank of Mum and Dad… Welcome to The Club!
Borrowing a deposit from ‘The Bank of Mum and Dad’ is not uncommon for First Time Buyers. Parents want to help their children (and get them out of the house!) and frankly, as First-Time-Buyers, we could use the help (and our own space!).
It's time to sit down with Mum and Dad and have THE TALK. No... not that talk, but the talk about borrowing or gifting a serious amount of dough so that you can buy your first home. Sometimes this talk can feel just as awkward as THAT TALK if you're not fully prepared!
Psychologist Corinne Sweet presents that, “talking about money is one of the last great taboos… Bringing up feelings connected to survival, worth, status, power and success.” If this sounds similar to you, please don’t panic. We all (including parents) carry ‘emotional money baggage’ which affects, “how we feel and talk about money.”
The only way to address it is, well, to address it. We’re here to help you find out how to talk about borrowing a mortgage deposit from The Bank of Mum and Dad.
Step 1: Book an appointment - Approaching the Bank of Mum and Dad
Bank of Mum and Dad should respond better if they are prepared to have the conversation rather than it coming out of the blue.
- Speak with your parents and let them know in advance that you wish to discuss finance with them and it is to do with borrowing your mortgage deposit
- Give your parents or the person you are borrowing the deposit from time to digest your request before asking for any confirmation
- Circle back in a day or so. Agree on a time to have the chat about their support with your first mortgage deposit
This also shows your keenness, confidence and strength to reach out and ask. You may have already brought this to their attention without knowing, or they may have been planning on helping you anyway! Step one is to plant the seed and let it grow, so everyone is prepared for the talk.
Step 2: Failing to Prepare is Preparing to fail - The Pre-Discussion Preparation
By preparing yourself for the discussion it not only helps show you're serious, but also that you're ready for this big step. Preparation gives you a sense of direction, confidence and knowledge, which is vital when talking to the Bank of Mum and Dad about borrowing a deposit.
Start by...
- Making sure you have your research prepared and copies with you if you need to use them during the discussion. Perhaps bring a copy for your parents too. Check out Ways your Parents can help you with a Mortgage.
- Make notes as you revise your facts and figures which could be brought up in conversation e.g. realistic repayment terms - monthly / yearly.
- Prepare for questions from your parents on your evidence; understand what it is you’re asking of them.
- Choose a comfortable location.
Remember: Even if the financial discussion doesn’t go as well as you hoped, the evidence you have generated on your dream home won’t go to waste - neither will your knowledge, as both of these can be used to either renegotiate or in discussion with your Mortgage Broker.
Step 3: THE TALK... Asking The Bank of Mum and Dad for a Mortgage Deposit
It’s time for ‘The Talk’. No, not that talk. Your ‘Financial Borrowing’ Talk. (Which some might argue is even more scary!)
First things first,
1. Let everyone get comfortable. (Cup of tea anyone?..)
2. Thank everyone for turning up, show your gratitude, and explain that you're really excited!
Discuss early in the conversation:
(a) How much money is required and if parents are able to lend, how much? Will any of the loan be gifted or is it to be entirely repaid?
(b) What the money will be used for, in this instance, a mortgage deposit.
By laying all cards on the table you’ll create a transparent environment and remove focus from any elephants in the room. The Bank of Mum and Dad will appreciate your clarity.
Remember: Don’t shy away from making notes as you progress through the discussion. Notes can be followed up after all areas of the discussion have been covered or whatever feels most natural. Allow time for questions and processing, expect no immediate answers.
Before moving onto the next section, The Bank of Mum and Dad and First-Time Buyer should be on the same page on the following…
- The amount of deposit money required.
- If they are able to lend money, is it a loan, gift or part-gift and part-loan.
- How much of the loan is to be paid back.
- What the deposit money is for.
At this stage it would be useful to keep a checklist of your group decision e.g...
- Agreed deposit amount to be borrowed = £24,000 ✓
- Of amount borrowed, how much is gifted (non-repayable) = £4,000 ✓
- How much is to be paid back = £20,000 ✓
- Understanding what the money's for = First Time Buyer Mortgage Deposit. = ✓
Next topic of discussion is the ironing out of any Borrowing Conditions.
Let me suggest the following borrowing conditions which you can suggest to your parents at this stage of the discussion.
Remember: You can think up your own to suit your situation. Be creative and realistic.
- Condition 1. First-Time-Buyer is required to save a certain amount before The Bank of Mum and Dad make their contribution. (Shows financial stability, e.g. save £10,000.)
- Condition 2. The Bank of Mum and Dad will benefit from helping you borrow a mortgage deposit. (Benefits such as Name on the property? Dinner every month at yours? A place to stay / where siblings can stay? Will parents profit if the property is sold in the future?)
- Condition 3. Will parents at The Bank of Mum and Dad have a say in the property? (E.g. location, decorations, furniture, and future selling price?)
- Condition 4. Does The Bank of Mum and Dad wish to add interest to the amount borrowed? If so, draw up an agreed repayment plan. (Include in the plan what will happen if there is a late payment or a payment is missed.)
Having conditions in place help to make both parties accountable as it sets realistic standards for all involved. It’s highly recommended that conditions aren’t just verbal and are in fact drawn up and signed by both The Bank of Mum and Dad and the First Time Buyer.
Checklist time…
- Have you agreed to the borrowing conditions? What are they? = Parents will have a say on the future selling price of the property and no interest will be added to the first time buyer’s repayment plan unless payments are repeatedly missed. ✓
- Has everyone agreed and signed a document where the conditions are clearly displayed? ✓
Moving forwards in your discussion The Bank of Mum and Dad and First Time Buyer should consider what to do if future circumstances change. Try discussing the following:
- What will both parties do if you fall into the financial wind?
E.g. If parents experience a drop in income, will the loan be repaid in full as soon as possible?
Will the borrower increase the rate of payments from yearly to quarterly or monthly?
If the borrower experiences a drop in income or gains a pay rise, will parents reduce the amount owed? Will the loan be wiped and valued as a gift which no longer requires repayment?
Having a backup plan for your back up plan may seem mundane but please don’t underestimate the value of this part in your discussion. Prepare suggestive answers to these questions beforehand, this will show that you have thought about the overall picture and specifics. Consider it as damage control and it’s better to have talked about it while tensions are cool and things are normal, rather than when trouble strikes and pressures are high.
Checklist…
Plan 1. What will I do as The First Time Buyer if you, The Bank of Mum and Dad fall into financial difficulty?
= I will assess my finances and attempt to increase the amount in our repayment plan. If I can afford it at this time I will do my best to repay all outstanding money as quickly and as large as I can. ✓
Plan 2. What will we do as The Bank of Mum and Dad if our adult child, The First Time Buyer, was to fall into future financial difficulty? ✓
= We will attempt to cover repayment for as long as possible and we will not add pressure to you as to the amount owed, verbal or otherwise threatening. ✓
= We will seek alternative help such as assessing our own finance at this time and if wiping out our repayment plan is possible we will attempt to do this for you. ✓
= If there is a quick financial turnaround however we may renegotiate with The First Time Buyer to set up a new repayment plan when they are back ‘on their feet’ financially. ✓
= It may be the case that we no longer wish to receive repayment and The First Time Buyer can be assured that the remaining borrowed money is considered a gift and repayments end. (If this is the case remember to have this documented and signed.) ✓
Renegotiation is a suitable response to this consideration as nobody knows what the future holds. Don’t fear renegotiation, embrace it. If your parents are willing to help you at this time, it is acceptable that you will help them in the future, if it is needed. Renegotiation helps to keep the ‘Borrower and Lender Relationship’ healthy. Open communication means that you are all on the same page and understand where each member is coming from - it’s not personal, it’s financial.
Tip: Even if you have clear conditions set and have prepared solutions to possible financial future issues, your group could attempt to re-evaluate your repayment situation every six-months. During these meetings both parties can confront any issues e.g. late repayments or struggles to repay etc. and come up with successful solutions. It’s also a time to check-in and see how you are all finding things. (It’s one way to stay in touch if anything!)
If you are buying your first home with another individual, it is appropriate to discuss the following with your parents:
- Will the mortgage and property be in The First Time Buyer and their partner/friend’s name or the parents?
- Is the loan specifically for the First Time Buyer and not to be used by their partner/friend?
- If the First Time Buyer’s relationship was to break down with their partner/friend, would this change any of the previous agreements?
As much as we hope for the best in our future relationships, it is valuable to risk assess at this point to avoid surprises later down the line. This is why we advise adding this to your thoughts before borrowing a deposit from The Bank of Mum and Dad.
Now that those topics are covered, both parties can address at this point any concerns they have and what can be done to ensure that they don’t become a problem. We can’t advise writing these things down or typing up a document enough as this acts as evidence your discussion took place and everyone had their say. (Remember: Things can be reviewed in six-months time!) Jotting down all worries and concerns allows your group to assess things from both each other's perspectives.
To get the most out of a conversation involving the bank of Mum and Dad, review Our Best Practices below. There is a section for First Time Buyers and a section for Parents. (Feel free to share this with your family.)
First Time Buyers:
- Make Amends - If you currently owe your parents money let them know your situation and your plans to repay them. Apologise, acknowledge the situation and ask how your parents would like to continue. You should try to remain open-minded and willing to resolve this as the first issue.
- Get Specific - Have research prepared. Include necessary facts and figures as this will help you to clearly show how your case is supported by evidence. Figures can be pulled from; Mortgage FAQ’s, 7 Ways Parents Can Help With a Mortgage, Thinking Of Buying a House?, COVID-19 For First-Time Home Buyers: A Blessing in Disguise, and our other blogs.
- Be Open-Minded - Show your parents the other options for securing your deposit (See 7 Ways Parents Can Help With a Mortgage). Assumptions may lead to finding yourself disappointed, so be cautious of this. It is ultimately your parents' choice and they are within their rights to decline to lend you any deposit money.
- Be Patient with Your Parents - Give them time to think about what they can realistically afford to lend you. You may not be able to get through the whole conversation in one sitting and that’s ok. Talking about money can be tough so it’s important to be patient and respectful throughout this process.
- Be Frank - Don’t let yourself feel embarrassed about asking for help, as we say, you’re not alone in this, and borrowing money from parents isn’t a new ideology. Make a record of everything you agree on throughout the conversation. Watch how far you go and trust the process.
Parents, or as we like to say, The Bank of Mum and Dad:
Here are some best practices to use when talking about finance with your child as a First Time Buyer.
- Be Sensitive - Talking about money can make anyone feel uncomfortable. It’s taken your child courage to approach you on this so try to be sensitive and listen to what they’re offering. They may have wishes that are aligned to your way of thinking and you may be able to squeeze in some creative conditions.
- Be Prepared - If you’re of an understanding that your child is looking at houses and trying to jump onto the property ladder, try to pre-empt their concerns and needs. Be prepared to discuss these with an open mind so that you can cover the topics as a team.
- Be Precise - If your child approaches you with a discussion, try to let them get through everything they have to say and show without interruption. Instead, make notes on a spare piece of paper or if your child has supplied you with a copy, use this to track any thoughts that pop into your head. Don’t feel pressured to make a decision right away, take time to digest, and gather your thoughts.
- Be Clear - Honesty is the best policy. Don’t try to pretend that you can afford more than you really can, if you’re unable to give any of the loans as a gift that’s ok. It’s ok if you can’t afford to loan anything either! Try to put forward an alternative idea in place of a deposit loan. (See 7 Ways Parents Can Help With a Mortgage and What Is A Mortgage Guarantor?)
- Be Frank - Don’t let ‘money-related-embarrassment’ consume you and get in the way of talking openly. Discuss your hopes, your worries, and your agreements. Keep everything documented that you agree on and what has been covered. This will help you to pick up the discussion at a later time if necessary.
So, what’s next?
Agreeing to seek further legal and professional advice is advised. If you want further peace of mind or simply some clarity on your next steps, seeking advice from your Mortgage Broker is a logical step. Add any further topics to research and make sure to include any wishes from your family that hasn’t quite been negotiated yet e.g. your sister has to make you breakfast when she stays-over.
Good-luck for your discussion with The Bank of Mum and Dad!
