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?
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.
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.
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:
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.
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.
There are two main approaches here:
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:
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:
You can also teach your kids to be entrepreneurs.Like that they can buy a house for themselves.
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!
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.
What about the tax liability of the recipient if the deposit is a gift?
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
What happens when your in laws gift money towards your first house? Are they entitled to this money back when u sell?
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?
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