Helping your children onto the property ladder

Helping your children onto the property ladder

23rd May, 2016

Many young adults are now relying on family support to help them onto the property ladder. 27% of Britons aged 55 and over have provided financial support to their children or others to help them to buy their own property.

First time buyers are finding it harder than ever to get a mortgage and people are waiting longer before choosing to settle down in their own homes- factors like these mean there has been a shift in the property buying climate. Almost half of British homeowners aged 55 bought their first home when they were 20 and 25 years old, while just 8% of 18 – 24-year-olds currently own a property and more than a quarter live rent-free with family or friends.

Many first time buyers find it difficult to secure an affordable mortgage deal, especially those with little or no deposit. Consequently, half of all first time buyers get some kind of assistance to make their purchase and very often this comes from parents.

If you are considering lending your children money for their first home, spend some time doing your homework and weighing up your options, so you can agree a strategy that looks after the interests of everyone involved. 

The easiest way to help is to gift your child enough money for a good sized deposit. Currently that is likely to be around 25% of the value of the property, although even a 10% deposit will broaden the range of accessible mortgage options. At the time of writing, there is no limit to the amount of money you can give to your children tax free. Any gift you give them in the future, however, could be taxed if you pass away within 7 years. 

There are alternatives if you would prefer not to simply give your children the money:

Loan them the money and charge interest

The rate of interest would need to be less than the market rate for the loan to be helpful. You can create a repayment schedule and make things formal via a 'promissory note’ (a written promise to repay monies borrowed) from a property solicitor. You’ll be refunded the money if and when the property is sold. Additionally, you can have a 'deed of trust' drawn up by a solicitor, stating the value of your contribution and how you will get it back following a future sale. Your children should not be taxed on the money you give them, but be aware it may affect their eligibility for some means tested benefits.

If you do not have spare cash available to give, there are other ways that you can help to raise a deposit:

Secure loan 

This is where you borrow money and your own home guarantees the loan. If you choose to go down this route, take your time finding a suitable deal with minimal interest payments. Bear in mind that if you opt for a secured loan and cannot keep up repayments your own home would be at risk, as well as your children’s.

Equity release

Borrow money against your own home. This is an equity release scheme, known as a lifetime mortgage. It’s way to give your children their inheritance early, by borrowing money on the understanding that it will be repaid when your home is sold, after your death.You can expect to borrow up to 50% of the value of your home (based on your age and health) repayments need not be made because interest accrued is added to the lump sum that must be repaid after you die. 

Help without borrowing money

There are a number of ways in which you can help your children without taking out a loan.These options can increase the amount your children can borrow, since your income will be accounted for as well as theirs. The options are:

Guarantor mortgages

You can act as a guarantor on their mortgage. So your income is taken into account when agreeing a mortgage deal, potentially meaning your child can borrow more. However, note that your responsibility as guarantor would include covering monthly mortgage payments if your child was unable or unwilling to pay. 

Joint mortgages

Taking out a joint mortgage with your child would also make you liable for any payments that your child could not afford, though you would co-own the property. You would need to agree with your child what share (if any) of the monthly payments you would pay. 

Offset mortgages

An offset mortgage is flexible. You can choose to pay off some of your child’s mortgage either as a lump sum or via regular payments, with the freedom to withdraw it again at a later date if circumstances change. Any contributions from you will lower the overall mortgage debt and repayments will fall accordingly. Conversely, withdrawal at a later date would raise the the overall debt again and the monthly payments would also increase. 

‘Mutually exclusive’ mortgage deals

Earn money on your savings while concurrently helping your child to get a mortgage with one of these schemes. You deposit funds in a linked saving account and this will act as a guarantee against the mortgage debt, enabling your child to secure a mortgage without the need for a large deposit. A condition of this kind of mortgage is that you can only withdraw from your savings account once a pre-agreed percentage of the mortgage debt is paid off. 

What about the risks?

None of these approaches are risk free, partly because we cannot predict the future - what if you give your children a deposit now but find yourself short of money and in need of assistance at a later date? And as with any mortgage, there is always the risk you could lose your home if things go wrong. Before giving your children a helping hand, ask yourself if you really can afford to help, not just now but in the long term. See a solicitor for professional advice and assess the terms and conditions with a fine toothed comb before signing up to a mortgage or loan you are named on. An independent mortgage broker will be able to answer your questions. 

If you feel ill at ease with the potential risks, think about other practical ways you can help, for example letting your children move back home while they save up. Look into Help to Buy and Rent to Buy schemes that offer a foot onto the ladder with no deposit needed. 


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