How does it work, and what are the potential pitfalls?
In the current property market, the bank of Mum and Dad (or even Granny and Grandad) has helped many people to buy their first home. With many people unable to save a deposit of a size to get a foot on the property ladder, parents and grandparents are finding themselves being called upon to fill this gap.
For many parents, they have already funded their children’s education. However, even after having begun a successful well paidcareer, being able to save enough to provide an adequate deposit for a property is beyond most applicants’ capability.
For those parents who may feel guilty for not having the funds available which can be put towards their son or daughter’s first home, the good news is that mortgage lenders are increasingly recognising this niche in the market by designing products aimed at those who aren’t able simply to hand over a chunk of cash for the deposit.
Guarantor mortgages for first time buyers
Guarantor mortgages allow borrowers to take on larger loans than the lender would normally be prepared to extend if a close family member is prepared to act as a guarantor on the debt.
Typically, parents or grandparents offer their own homes as collateral on the children’s mortgage. They will need to have a decent chunk of equity in the property – 25% is a standard minimum requirement – on which their children’s lender will put a charge. If the children keep up with their repayments, there’s nothing for the parents or grandparents to pay.
Nevertheless, there are pitfalls with guarantor mortgages. Above all, should your children default on their loan, you’ll be liable to make up the shortfall – you might have to remortgage your home to do so, and in extreme circumstances it could be subject to repossession.
Parents and family offset mortgages
With a family offset mortgage, parents or grandparents can put their savings into an account linked to the child’s mortgage. The children can’t get at the money, but it effectively serves as a deposit. It also lowers interest charges, as the savings balance is deducted from the value of the loan.
The advantage of this type of deal is that parents don’t have to give their money away, though they will have to leave it locked up for an extended period, typically until the child’s mortgage is worth only 75% to 80% of the property value. However, it will eventually be available to them in the years ahead once again.
Should you help your children buy a house?
This will be influenced by everything from your approach to parenting, your relationship with your children and your financial circumstances.
Fully understand how potentially helping your children will affect your finances? Your Lifetime Wealth Model.
If you decide to lend a helping hand, you need to be sure that you are going about it in the right way: to protect your own interests, as well as your children’s.
If you do not want to simply give them money, here are five other options available:
1. You can loan them the money and charge interest each month.
If you charge interest, it would need to be less than the market rate for the loan to help. Think about setting down a repayment schedule at the start and formalising the arrangement via a ‘promissory note’, which would need to be drawn up by a property solicitor.
2. You can get the money back if and when the property is sold.
When you give your children money for a deposit, you can have a ‘deed of trust’ drawn up by a solicitor. This will set out how much money you have contributed and how you will get it back if your child sells the property in the future.
Your children should not have to pay Income Tax on the money you give them; however, it may impact their eligibility for some means-tested benefits.
3. You can buy a house for your children to live in.
Parents with money to spare can always buy a second home and allow their children to live in it, or they could become joint owners of a house or flat with their children. However, the aim of many older people is to see their children become financially independent, and they would prefer them to take responsibility for their own accommodation – perhaps with a little financial assistance – rather than having an ongoing involvement.
4. You can downsize.
Many people consider downsizing to smaller properties once they get closer to retirement, as the amount of space they need falls.
Downsizing might offer another way to help your children access the housing market without breaking the bank. By selling a relatively large family home and moving into a smaller property, parents could put some of the money they make from the sale towards their child’s deposit – helping the next generation start their own climb up the ladder.
5. You can make some money by renting out a room.
If you’re willing to think outside the box, renting out a room could prove a clever way of making some money, which could then be ploughed into a family member’s deposit. If you’ve got a spare room in your house which is going to waste, getting in a lodger or renting it out to tourists through sites like Airbnb may offer a new way of quickly generating some cash. The Rent-a-Room scheme allows owner occupiers to receive tax free rental income of up to £7,500 in 2017/18 if various conditions are met.
Helping you make the right decisions
With so many ways you can help your child on their journey to becoming a homeowner, it’s important to put in the time to properly research the various options. Through financial planning, we can help you make logical decisions about helping your children to buy, and we can also help with mortgages and advice around structuring.
Please contact us for an obligation-free introductory conversation today – we look forward to hearing from you.
Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. The value of investments and income from them may go down. You may not get back the original amount invested. Past performance is not a reliable indicator of future performance. A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.