Secured Loan to Help Your Child Buy a Home

How Parents Help Children Buy Homes: The Main Options

There are several ways parents can assist a first-time buyer, each with different legal, tax, and financial implications. The most common approaches are: providing a gifted deposit; acting as a guarantor; taking a joint borrower sole proprietor (JBSP) mortgage; or raising capital via a secured loan or remortgage on the parents' own property.

A gifted deposit is the simplest approach in principle — parents provide cash as a gift towards the deposit, with a letter confirming that it is a gift and not a loan. Most mortgage lenders require this declaration and will not accept deposits that are actually loans in disguise, as this would affect the buyer's debt-to-income ratio. The gift has no conditions attached, and the parent has no ongoing obligation or financial exposure once the money is transferred.

A JBSP mortgage allows a parent to be added to the mortgage application alongside their child, which can boost the borrowing capacity by including the parent's income in the affordability assessment. However, the parent does not appear on the title deeds and therefore does not incur additional Stamp Duty Land Tax (SDLT) on the purchase. This is a useful structure where the child's income alone is insufficient to borrow the required amount. The parent has a legal obligation to meet repayments if the child cannot, which should be clearly understood before proceeding.

A standard guarantor mortgage is a simpler form of support, where the parent guarantees the mortgage repayments but does not contribute to them unless the child defaults. However, guarantor mortgage products are less widely available than they once were, and many lenders prefer the JBSP structure.

Raising capital via a secured loan on the parents' property is relevant when the parents do not have sufficient liquid savings to gift a deposit but do have significant equity in their home. By borrowing against their own property, the parents can release cash to give to or lend to their child for the deposit.

Tax Implications of Gifting a Deposit

Gifting a deposit to a child buying their first home has several tax implications worth understanding. From a Stamp Duty perspective, a gift reduces the buyer's mortgage requirement and may bring the total purchase within a lower SDLT threshold — first-time buyers in England pay no SDLT on the first £425,000 of the purchase price (as of 2024), making many first-time purchases SDLT-free.

For Inheritance Tax (IHT) purposes, gifts from parents to children are treated as potentially exempt transfers (PETs). This means that if the parent survives for seven years after making the gift, it falls outside their estate for IHT purposes. If the parent dies within seven years, the gift may be partly or fully subject to IHT on a tapering scale. The annual gift exemption (£3,000 per person per tax year) and small gifts exemption (£250 per recipient per year) do not apply to large deposits, but they can be used to make the gift in stages if timing allows.

Gifts from regular surplus income — for example, if a parent has excess income and gifts money each month without reducing their standard of living — can be treated as immediately exempt from IHT under the normal expenditure out of income exemption. This is worth exploring with an estate planning solicitor or financial adviser if regular contributions are planned rather than a single lump sum.

If the parent provides the deposit as an interest-free loan rather than a gift, this is technically a discounted gift and has different IHT and income tax implications. The mortgage lender must be made aware of any outstanding loan obligations, as these affect the buyer's affordability assessment. Most lenders will not accept a deposit sourced from a loan.

Using a Secured Loan to Release Equity for a Child's Deposit

For parents with equity in their home but limited liquid savings, a secured loan is a practical way to release capital to contribute to their child's deposit. The parent borrows against their own property, receives the funds as a lump sum, and gifts or lends the money to their child. The child uses this alongside any savings of their own to make up the required deposit on the purchase.

From the mortgage lender's perspective — for the child's purchase — the source of the deposit funds matters. The lender will typically ask for a gifted deposit letter confirming that the money is a gift and that the parent has no claim over the property. Providing a false gifted deposit letter where the money is actually a loan would be mortgage fraud. If the arrangement is genuinely a loan from parent to child, this must be disclosed to the lender, who will factor it into the affordability assessment.

For the parent, the secured loan adds to their monthly outgoings and reduces their available equity. Before proceeding, ensure that the additional monthly commitment is comfortably affordable alongside the existing mortgage and other financial obligations. It is also worth modelling the impact on retirement planning — using home equity to fund a child's deposit means less equity available for the parent's own future needs, whether for care costs, downsizing income, or equity release.

Some parents prefer to remortgage their property to raise funds rather than take a separate secured loan. This may be more cost-effective if the mortgage rate available on a remortgage is lower than a secured loan rate. A whole-of-market broker can compare both options and identify the most suitable structure for your circumstances.

Joint Borrower Sole Proprietor Mortgages as an Alternative

A JBSP mortgage is an increasingly popular alternative to parental equity release for families where the child's income alone is insufficient to borrow the required amount. Under this structure, the parent is added to the mortgage as a co-borrower — meaning their income counts towards the affordability assessment and they are jointly liable for mortgage repayments — but they are not added to the property title. This avoids the parent being treated as an additional property owner and therefore avoids the 3% additional SDLT surcharge that would apply if a property owner added a second property to their portfolio.

JBSP mortgages are offered by a growing number of UK lenders including Barclays, Nationwide, Bath Building Society, and various specialist lenders. The qualifying criteria vary — some lenders impose age limits on co-borrowers, require that the co-borrower's income is from employment rather than self-employment, or cap the contribution of the co-borrower's income at a certain level.

The key advantage of JBSP over the parent releasing equity is that it does not require the parent to have savings or available equity — it simply uses their income to support the child's mortgage application. The key disadvantage is that the parent is jointly liable for the mortgage repayments and the lender can pursue them if the child defaults.

For families where parental equity release is not practical but parental income is available, JBSP can be an elegant solution that preserves the parent's equity and avoids SDLT complications. A mortgage broker with experience in first-time buyer transactions can advise on the most suitable lender and structure for the family's circumstances.