More than a third of all first-time buyers now rely on help from “The Bank of Mum and Dad”. According to research, parents now part-fund 34.1% of property purchases, up from 20% seven years ago.
If you are one of the many parents handing over the cash, what are your options?
Gifting money
Gifting money is exactly that and probably the simplest way of helping your children. Generally most banks and building societies are happy with this as a form of deposit however it can have consequences for Inheritance tax (IHT). IHT is paid if a person’s estate is worth more than £325,000 when they die. The donor must live for seven years after giving the gift for the amount to be fully exempt of IHT. Any gifts made less than seven years before death count towards the threshold.
Lending money
Some parents may prefer to lend their children money, with it being paid back monthly or at some point in the future – when the property is sold for example.
Drawing up a loan document can be fairly straightforward and should set out any interest payable and the repayment schedule. It needs to be signed by both parties.
Ideally the agreement would set out what will happen to the money if one of the parties dies, or if the parent needs the money back.
Any loan agreement would need to be disclosed to the mortgage lender to be factored into the affordability assessment. In most cases this will affect the amount you can borrow and in some cases the lender won’t accept the case at all.
Guarantor and joint mortgages
Parents can also help their children onto the property ladder by acting as guarantor on their mortgage.
This means their income is taken into account when agreeing a mortgage deal, potentially allowing the child to borrow more.
However, as a guarantor, the parent would have to agree to cover the child’s mortgage payments if they were unable or unwilling to do so.
Another option is for parents and children to take out a joint mortgage on a property. The difference here is that the parent would legally own a share of the property. Both parties would be jointly liable for mortgage repayments.
Offsetting savings
Banks and Building Societies are coming up with some clever schemes to help parents support their children without dipping into savings or re-mortgaging their home. This can be achieved simply by transferring existing savings into a specified account with the mortgage lender or by having a charge put against the parents’ home.
Assuming the children keep up their payments the parents will receive, after an agreed period their savings back with interest or have the charge removed from their home.
The selling point is that in effect the child can borrow 100% and the rate for Mortgage is significantly cheaper than a mainstream mortgage that you could get with a deposit of just 5%.
Equity Release
Older parents or grandparents can opt to take an Equity Release mortgage on their own house and gift or lend the money to the child /grandchild. There are schemes where the interest on these loans can be paid back monthly (sometimes by the child) and others where it is simply allowed to roll up until the parent /grandparent dies. This is a complex area and all parties should take independent financial and legal advice.
If you are thinking about helping a family member get on the housing ladder and would like to discuss your options in more depth, please call us on 01628 507477 us for a free no obligation appointment.
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