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First of all, depending on the lender, the deposit is likely needed to be a gift rather than a loan. The reason being is that should the bank ever need to repossess, there would be a conflict over who go their funds back first. A bank is unlikely to accept parents paying the mortgage as should they stop the payments, your niece will still be liable for them.
What your niece may wish to consider is renting her home out and approaching her current lender for a consent to let whilst asking to switch the mortgage to interest only. The reason being is that should their be periods when the property is untenanted, it will be easier to cover the mortgage payment. Double check with the solicitor but I believe an extra 3% of the new property purchase price stamp duty will have to be paid.
This just leaves the purchase lender to be satisfied that the property in the backgrounds rental income is enough to cover the mortgage. This will need to cover itself by a certain percentage threshold and depending on the bank, can often be evidenced by a letter from an ARLA (Association of Residential Lettings Agents) estate agent.
It absolutely will have to be paid. But can be claimed back after sale. It takes about 30 days to get the payment from HMRC which isn't too bad.
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