Should I help my children to buy a house?
There is no single answer to that question; it is a personal decision that will beinfluenced by everything from your approach to parenting and your relationship with your kids, to your financial circumstances.
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?
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 a 10% deposit 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, in the future any gift you do give could be subject to inheritance tax if you pass away within 7 years, read our guide Inheritance Tax: The Basics for more details.
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 up to you (you could make it an interest free loan if you wanted), but it would need to be less than the market rate or the loan would not 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.
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). 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.
Your children should not have to pay tax (i.e. income tax) on the money they receive from you as a gift, however, it may impact their eligibility for some means tested benefits should they receive any now or need to claim any in the future.
For more information on lending money to family and friends, and how to make sure you get it back, read this guide .
I do not have that kind of money available, are there other ways?
If you do not 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:
You can use your own home to borrow money in the form of a secured loan, using your home as a security. Finding the right deal and 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 is not a decision to be taken lightly.
You can use an equity release scheme called a Lifetime Mortgage to borrow money against your own home. 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. This is not a straightforward option so it is 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, which 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:
Guarantor mortgages: This is a way to help your child buy a home without directly lending them money. 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. Read our guide, Being a guarantor for a mortgage: should you risk it? for more advice.
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.
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.
'Mutually exclusive' mortgage deals:These schemes allow you to earn money on your savings whilst still helping your child to get a mortgage. You must have a minimum of £20,000 in a savings account linked to the mortgage, 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?
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 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
Can they get on the ladder without my help?
If you are still unsure that you can afford to lend a hand, or are uncomfortable with the risks, there are other ways they can buy their first home.
Saving for a deposit is never easy, and one way you could help is by welcoming your kids back into the family home so they can cut down their outgoings. Try these 7 ways to save for a deposit (including moving home) for more tips.