Are you planning on borrowing money from your parents to buy a house?
Borrowing from the ‘Bank Of Mum and Dad‘ is becoming more and more common. According to the ‘Post Office’, one in six first time buyers are funding their home purchase by using a parental loan and I can officially say that I am one of them.
We have been saving up for a house for exactly one year now. The end of our journey is in sight and I am so excited. I can’t wait to jump off the renting wagon and to settle my family into a home that is ours. Despite saving long and hard, we really wouldn’t be where we are today without having some help from my parents. Something I will be eternally grateful for.
Borrowing money from your parents to buy a house can be tricky business though. Whether it is a gift or a loan, I can say first hand that money can cause a big shift in your relationship. Along our journey I have learnt several tips on how to do things the right way. If you’re planning on borrowing money from your parents to buy a house, or if you are a parent who wants to loan, or gift, your children money to buy a home, then there are some things you need to know before you do.
The ‘Post Office’ have kindly teamed up with me for this post. The Post Office Money and The Money Charity have actually created a ‘Bank of Mum & Dad‘ conversation guide that is well worth a read. With help from their guide and my own personal experience, I’ve put together some top tips that I really wanted to share with you:
5 Tips For Borrowing Money From Your Parents To Buy A House:
According to previous research conducted by the Post Office, 35% of first time buyers are receiving financial support to help them purchase their first home and get onto the property ladder. This support is coming in either the form of a gift or a loan. I have to say, that is quite a substantial figure, but actually quite unsurprising in todays climate.
So, if you’re planning on borrowing money from your parents to buy a house, the first thing you need to establish is whether it’s a gift or a loan.
1. Is It A Gift Or A Loan?
Both parties need to be clear from the offset about whether or not the money is a gift, or if they’re expecting repayment. If your parents are expecting repayment, then it’s so important to make sure that the repayment terms are made really clear.
From the word go, we agreed that my parents would ‘loan’ us the money, rather than gift. As we don’t yet have our mortgage and the money hasn’t yet been needed, we are still in the process of deciding on the repayment terms that we will, eventually, put into place.
According to Post Office Money, 16% of buyers enter a long-standing loan agreement with their parents but, only one in five millennial buyers actually agree a monthly repayment plan with parents. For me personally, I would feel much more comfortable with a plan in place.
At the moment we have only been able to forecast what we can pay back, based on potential numbers. But, the first thing we will be doing when our mortgage comes through, is coming to a set agreement with my family. But, you need to decide what works best for you and make your intentions clear for the word go.
2. Put yourself in their shoes
If you are borrowing money from your parents to buy a house, then a good idea for both parties is to ‘put yourself in their shoes’. When my Mum first suggested loaning us some money for a house, I initially hated the idea. I really didn’t want be a burden to my parents and I didn’t like the idea of taking their money and also feeling indebted to them.
The Post Office Guide suggested I put myself in my parents shoes. That’s exactly what I did. I realised that regardless of how I might feel, my parents really don’t like seeing their daughter wasting money on rent, when I could be investing that money in a property and my future. They also want to see me settled and want to make sure that I have security for myself and my daughter. Understanding each others point of views was really helpful in getting us to come to a decision. Which brings me to my next tip…
The most important tip to remember, when borrowing money from your parents to buy a house, is to communicate. One thing I was worried about at first, was my relationship with my family. Borrowing money can bring up some really strong feelings. For me, not only did I not like the idea of feeling indebted to my family, but at first I was really scared about the pressure of paying the money back. I also felt inadequate, because I had really wanted to save the money for myself and was trying really hard to do so.
Once we sat down and opened up to each other, all of my worries went away. But it’s not just initial talks that are important. Constant communication is key.
I soon discovered that my Mum had her own worries too. She was worried about how she would approach bringing up ‘repayments’ to me. She also felt a bit uneasy about depleting her savings and also worried about what would happen if something changed financially for her. This brings me into my next point…
4. Factor In For A Change In Circumstance
As this blog is called ‘Life Unexpected‘, it would be silly not to include factoring in for a change in circumstance. If life has taught me anything in the last five years, it’s that it can be pretty unexpected.
Five years ago I never expected to have my daughter. I also never expected I would become self-employed and land my dream job. There were also some negatives I didn’t expect either. Like the break down of a relationship and the struggle to buy a house because of my employment status.
Buying a house is a very long process and during that time circumstances may change. Something financially might happen to my parents, something might happen to us. As we’ve agreed to pay my Mum back, one thing we are having to factor in and talk about is; ‘what would happen if there was a change in circumstance’. What would happen if she lends me money and then she loses her job? Would I have to pay her back straight away? What happens if I suddenly get a pay rise? Would I be expected to increase my payments? This brings me to my final point…
5. Get outside advice
Getting outside advice and even considering a formalised legal agreement is really wise. Even if you have the best relationship with your parents, talking about money isn’t always easy and things can change down the line. Getting advice from somebody else, or speaking to a solicitor can make both parties feel a lot more comfortable.
According to the Post Office, the majority of parents do not formalise an agreement with their house buying children, which I find crazy. But, failing to provide a deed of gift or letter of intent could actually put them at risk legally.
Our House Buying Journey So Far
Over the next couple of weeks, we will be taking our house buying to the next level. We are in the process of applying for a mortgage and are seeking outside advise in regards to the loan my parents are kindly giving us.
Over the coming months, we’ll be sharing a lot more of our house buying journey with you. From tips to save money for a deposit quickly, to things we’ve learnt on our house buying journey so far. Fingers crossed we’ll also be able to show you our very first home, by the end of the year!
Are you saving or looking to buy a house at the moment? Are you planning on borrowing money from your parents to buy a house, or is this something you’ve already done? Let me know in the comments below.