You may not expect to see the ‘Bank of Mum and Dad’ on a list of mortgage lenders, but according to Legal & General, parents supported property purchases worth £77bn last year, which makes them one of the top ten lenders.
And with rising numbers of ‘adult’ children still living at home, parents may feel under pressure to dig deep to help their offspring get a foot on the property ladder, unless they want to be living with them for many years to come. The number of 25 to 34 year olds still living at home has risen 37 percent over the past 10 years, according to research from Aviva Insurance. It says this increase coincides with a 45 percent rise in property prices for first-time buyers, up from £146,0000 to £210,000 over the same period.
Based on these figures, even a five percent deposit demands, a substantial £10,500, before they can even get on the first rung. Legal & General’s report says the ‘average’ contribution from parents last year was £17,500 (typically seven percent) of the average purchase price, and in the majority of cases (57 percent) parents give this handout as a ‘gift’. Clearly, not everyone is in a secure enough financial position to afford this, but helping out financially doesn’t have to mean giving away your life savings. So if you want to help your kids on the property ladder without going bust, what can you do?
Go in as ‘guarantor’
On the surface, this can seem a low-cost way to help out as you’re not handing over any money. However, you have to trust your kids if you take this route,, as being ‘guarantor; means that if they don’t keep p the mortgage repayments, their mortgage lender will come knocking and ask you to stump up. And if you’re still paying off your existing mortgage, or finances are tight you don’t want to risk having to plunder your pension pot to cover their repayments if they slip up, think carefully before taking this route. On the plus side, a ‘guarantor’ isn’t necessarily for life. Depending on the outstanding loan and your children’s repayment record, you may be able to release yourself from acting as ‘guarantor’ later on.
Give your kids the cash
If you’re in a position where you can afford to ‘give’ or ‘gift’ your kids a limp sum to put down as a deposit, this may sound like a food way to get them started. Just be aware of the potential Inheritance Tax implications associated with this. While you can ‘gift’ or give away £3000 a year without worrying about this, giving larger sums means you’ll need to live for 7 years for it to escape any potential tax liability, as it would otherwise be added into the value of your estate when you die. There are other ways to ‘give’ money tax-free, such as when your children get married, when you can ‘gift’ them £5000 each, so it’s worth investing if you’re considering this option. Another thing to consider is whom you’re giving the money to. If you child is getting married and buying a property in joint names, and you hand over a cash deposit, if the relationship breaks down, any money you’ve given could end up in the matrimonial pot and be split between both parties when the finances are divided up.
Offer them a ‘loan’
Not everyone is in a financial position where they’re comfortable enough to hand over cash to their kids, or even believe it’s the right thing to do, but if you’re earning next to nothing on your savings, then ‘lending’ he money to your kids on the promise of getting it back plus interest, or a share of the property when it’s sold, can be tempting. There are several things to consider here. First if your kids are repaying the money regularly (with or without interest) this can mean they get a lower mortgage offer, as lots of lenders look at ‘affordability’ rather than income multiples these days.
On the down side, there’s no cast-iron guarantee you’ll get you money back, as in most cases you may be unlikely to get legal documents drawn up as proof of the ‘loan’. While it may seem totally unlikely, in the event of a family rift or fall-out you may not get your money back unless you can prove that you legally have a stake in the property. One way round this is to register a ‘charge’ on the property so that when it’s sold you can get you money back and this also acts as protection if your son or daughter is buying with a partner and their relationship breaks down. It’s worth seeking legal advice on this. Citizens Advice had a list of local solicitors offering an initial ‘fixed fee; appointment where you can pay a reduced rate for a one off session.
Release equity from your family home
Remortgaging to release a chunk of the equity in your own home avoids the need to part with savings and can enable your kids to put down a bigger deposit. And the bigger the deposit, the more choice they’ll have when it comes to mortgage deals. Armed with a five percent deposit, there’s a choice of 283 mortgage deals but with a 10 percent deposit, this opens the door to more than 6000, according to moneyfacts.co.uk. Nationwide’s ‘Family Deposit’ scheme enables existing customers, or those switching their mortgage to Nationwide, to borrow against their home and give the money raised to another family member who is moving or buying their first home. Rather than a straight ‘remortgage’, this scheme offers preferential rated; however, any money released must be ‘gifted’ to the borrower and can’t be loaned. And when it comes to Nationwide’s definition og ‘family’, this includes children. stepchildren and grandchildren.
Buy with your child
You won’t need to live there, but you can ‘buy’ a property with your child and be on the title deeds alongside them. If you already have a property, you’ll be classed as ‘second home owner’ which can have implications on both Stamp Duty and any potential Capital Gains Tax due when the property is sold, depending on how much profit you make. Market Harborough Building Society offers a ‘Family Shared’ mortgage where family members can club together to buy the property jointly. From the parents’ point of view, this can be done as a ‘second mortgage’ of they’re still paying off their own loan, with any mortgage loan based on ‘affordability’. A 25 percent deposit is needed for his option and up to four family members can go on the title deeds. However, it’s still possible to buy a place even if no deposit is available as Market Harborough offers a ‘Family Assist’ mortgage where a 100 percent loan ca be made, but for security, a ‘charge’ is put on the parents property. Beware, however, that this isn’t for small amounts. The building society rules say this must be for a minimum of £75,000 (or 35 percent) of the property value, and if the kids don’t keep up the repayments, in the worst case their parents’ home could be repossessed.
(Article source: Choice)