How Can I Help My Children Buy Their First House?

With many first time buyers still finding it all but impossible to secure a mortgage, some parents have taken the decision to give their children a helping hand onto the property ladder. But how does it all work and what are the potential pitfalls?

Man Woman Carrying Boxes

Should I help my children to buy a house?

Clearly there is no single answer to that question. It is a personal decision that will be influenced by everything from your approach to parenting and your relationship with your kids, to your financial circumstances.

One thing is certain, however; if you do 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 those of your children.

Why are they likely to need help?

Put simply, getting on the property ladder for the first time is harder and more expensive than ever. Many first time buyers, particularly those with little in the way of a deposit, find it difficult to secure an affordable mortgage deal with which to purchase their new home.

Given the difficulties they face, it is no surprise that around half of all first time buyers get some kind of help with their purchase - more often than not from the Bank of Mum and Dad.

How can I help?

There are a number of options, but the right one for you depends on your circumstances.

The easiest way to help is to give your child enough money for good sized deposit as a gift – in the current mortgage market, that is likely to be around 25% of the value of the property however (though even 10% will open the door to a broader choice of mortgage deals). At present, there are no immediate tax implications as you can give as much money as you like to your children tax free. However, if you die within seven years of making the gift, the loan will be treated as part of your estate and may be subject to inheritance tax.

If you do not want to simply give your children the money, there are other options:

  1. You can loan them the money and charge interest each month.
    How much interest you charge is entirely up to you (you could make it an interest free loan if you wanted), but clearly it would need to be less than the market rate or the loan wouldn’t really help. If you do provide your children with a loan, you should 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 (again, by a solicitor). In essence, this document 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.

I don’t have that kind of money available, are there other ways?

Yes, there are. If you don’t have ready cash available you can use your assets (usually your own property or income) to help. In this situation, there are two basic approaches. You can use your home or another asset to raise cash which you then give or loan to your children. Alternatively, you can use your own home or income to help secure a better mortgage deal for your children.

How do I use my home to raise cash?

There are two main approaches here:

  1. You can use your own home to borrow money in the form of a secured loan, using your home as a security.
    Clearly, finding the right deal here, keeping interest payments to a minimum, is essential so shopping around is a must. Remember though that if things went badly wrong, your own home would be at risk, as well as your children’s so this isn't a decision to be taken lightly.
     
  2. You can use an equity release scheme called a Lifetime Mortgage to borrow money against your own home.
    In simple terms this is a way to give your children their inheritance early, by borrowing money on the understanding that it will be repaid after your death, via the sale of your home. Typically, you can borrow up to 50% of the value of your home (depending on your age and health) and will not have to make any repayments – interest is added to the lump sum that must be repaid after your death. Again, this isn't a straightforward option so it's important to do your homework before jumping in.

How do I use my home or income to help, without borrowing money?

There are a number of options here, which essentially boil down to promising to help pay the mortgage once any sale is completed. This approach will help your children to borrow more, since your income will be taken into account as well as theirs. The options here include:

  1. Guarantor mortgages:
    This is a way to help your child buy a home without directly lending them money. Essentially, you would act as a guarantor, which would allow your income to be taken into account when agreeing a mortgage deal, and potentially allowing your child to borrow more. However, as a guarantor, you would have to agree to cover any monthly mortgage payments linked to your child’s home if they were unable or unwilling to do so.
     
  2. Joint mortgages:
    You could take out a joint mortgage on the property, which would also make you liable for any payments that your child could not afford. The difference here is that you would legally own a share of the property, whilst what share (if any) of monthly payments you take on would need to be agreed with your child
     
  3. Offset mortgages:
    If your child agrees to opt for an offset mortgage, you will have flexibility to pay off some of their mortgage either as a lump sum or via regular payments, but still withdraw it again at a later date should circumstances change. Any money you put in will reduce the overall mortgage debt, with repayments falling as a result. If you later withdraw any of your money, the overall debt would rise again, as would the monthly payments.
     
  4. ‘Mutually exclusive’ mortgage deals:
    These are new schemes that allow you to earn money on your savings whilst still helping your child to get a mortgage. Basically, you must have a minimum of £20,000 in a savings account linked to the mortgage (earning interest as usual), which will act as a guarantee against the mortgage debt. This guarantee will enable your child to secure a 95% mortgage without paying a higher lending charge (i.e. they will pay lower interest on the loan). The catch is that your savings must remain untouched until a pre-agreed portion of the mortgage debt is paid off – so if you may need access to your savings this is probably not an option.

What are the risks associated with helping my children to buy a home?

It is important to be clear that there are risks in all of these approaches. For instance, if you simply give money to your children, what happens if you need the money at a later date? Similarly, what happens if you act as a guarantor on your child’s mortgage but are not able to make the mortgage payments if required? Like any mortgage, there is always a risk that you could lose your home if things go badly wrong.

Before taking any of the routes described here it is important that you:

  • Think very carefully about whether you can really afford to help – not just now, but over the next five to 10 years
  • Get professional advice, preferably from a property solicitor
  • Read and understand all and any terms and conditions before signing up to a mortgage for which you might fall liable
  • Make sure your child gets the best mortgage deal available to them with your help
  • Get help from an independent mortgage broker if you have any questions at all

Do you have a question?

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Responses

You can also teach your kids to be entrepreneurs.Like that they can buy a house for themselves.

by kavi_khani, 29 Jun 2013

How narrow minded! You clearly own your own house and have no idea of the current lending criteria! My partner and I have a large deposit and earn more than the average salary each and we are still at this moment in time unable to get a mortgage! My partner, by the way, started his own business from scratch- an entrepreneur would be a suitable adjective. When we were in our twenties there would've been no way of saving for a 10% deposit and it is still the same now, if not worse. If some can get a helping hand then good luck to them, it doesn't mean their parents haven't taught them any less or that they aren't successful or can't stand on their two feet. It's just bloody hard to get a mortgage these days!

by Kohsamui1, 2 Jul 2013

Well said times have changed due to the very relaxed nature the lenders took to advancing monies self certification was abused and money was borrowed to try and make a quick buck !! but as times got hard and the banks started to feel the squeeze so it came back on both the savers with very low interest payments and the borrowers unable to get a reasonable mortgage. remember a mortgage is for a good part of your life not just for "christmas " i have helped my son with his purchase of his first property.

by nickph, 24 Sep 2013

What about the tax liability of the recipient if the deposit is a gift?

by smalley, 2 Dec 2013

At present, there are no immediate tax implications as you can give as much money as you like to your children tax free. However, if you die within seven years of making the gift, the loan will be treated as part of your estate and may be subject to inheritance tax

by juliebeau, 22 Dec 2013

What happens when your in laws gift money towards your first house? Are they entitled to this money back when u sell?

by Kayleigh1982, 24 Dec 2013

What if I am ill and need care within seven years? Is it true that my LA could claw it back to cover any care home fees? Do I need to consider whether this gift could be construed as me trying to avoid paying my own care home fees?

by Nuns, 2 Jan 2014

When I worked as an estate agent, a middle-aged couple walked into our office to say they were looking for flats for their son. Not only were they helping the young man with his deposit, but they were also out there looking for the property too. The estate agency manager's response to the mother was: "Change the locks madam. It's cheaper."

by che_lucas, 4 months ago

what if you want to help them with the deposit but also want to own that percentage of the property? My money is part mine and part my husband who is their stepdad's.

by mummy14, 4 months ago
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