With first time buyers finding it harder than ever to get a mortgage, some parents are giving their children a helping hand onto the property ladder. But how does it all work and what are the potential pitfalls?
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
Yes. Lending money to family to buy a house has become common practice, especially in the the UK where property prices have risen so quickly. Parents can choose to buy their children a house. How they do can vary between them buying the house outright, or helping their children with the deposit to a mortgage.
This will be influenced by everything from your approach to parenting, your relationship with your kids, and your financial circumstances.
If you 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 your children's.
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.
However, it can still be possible for your children to buy their first home. Our guide explains how to get a mortgage with little or no deposit.
The easiest way to help is to give your child enough money for a good sized deposit as a gift. In the current mortgage market, that is likely to be around 25% of the value of the property (although 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.
You can loan them the money and charge interest each month. If you charge interest, it would need to be less than the market rate for the loan to help. 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 by a solicitor. This 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 income tax on the money you give them; however, it may impact their eligibility for some means tested benefits.
If you do not have spare cash available you can use your own property or income to help raise a deposit:
You can use your own home to borrow money in the form of a secured loan, which means using your own home to guarantee the loan.
Finding the right deal and keeping interest payments to a minimum is essential so shopping around is a must.
Remember though that if things go wrong, your home would be at risk, as well as your children's, so this is not a decision to be taken lightly.
Here is how homeowner loans work, and what you need to consider before you apply.
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.
To understand the features and risks, ask for a personalised illustration from a lifetime mortgage company. Check that this type of mortgage will meet your needs if you want to move or sell your home or you want your family to inherit it. If you are in any doubt, seek independent advice. Your home may be repossessed if you do not keep up repayments on your mortgage
There are a number of options that let you help your children without taking out a loan.
These can help your children to borrow more, since your income will be taken into account as well as theirs. The options here include:
You can help your child buy a home without directly lending them money by acting as guarantor on their mortgage.
This means your income is taken into account when agreeing a mortgage deal, 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.
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. What share (if any) of monthly payments you take on would need to be agreed with your child.
If your child opts 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.
These schemes allow you to earn money on your savings whilst still helping your child to get a mortgage.
You deposit funds 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 mortgage without needing a large deposit.
The catch is that your savings must remain untouched until a pre-agreed portion of the mortgage debt is paid off.
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 you are named on
Make sure your child gets the best mortgage deal that is available to them with your help
Get help from an independent mortgage broker if you have any questions at all
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.
Whether you are looking to move up the property ladder, downsize or just relocate we can help you find the right mortgage when you move home.