Buying a home for the first time is fraught with obstacles. First there’s the task of raising a decent deposit, then there’s ensuring earnings allow you to borrow enough on a mortgage for the kind of property you would like, in the area you’d like to live in. There’s also the long list of costs such as stamp duty and legal fees.
Many parents of first-time buyers are continuing to offer help from the so-called bank of mum and dad – once described as the UK’s sixth largest lender – to take some of the financial strain.
You may want to help with raising a deposit to give your children the jump start they need. Yet for some it’s the mortgage that’s the sticking point – particularly if they are low earners or live in a very expensive city – or both. So you may want to explore how you can help on that front.
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Mark Harris, chief executive of mortgage broker SPF Private Clients, says: “A growing number of parents are helping children onto the housing ladder in one way or another and there is a growing array of options available to cater for this market. One size doesn’t fit all so it’s important to do your research first and seek independent advice, both financial and legal.”
We look at some ways in which you can help.
Gift towards a mortgage deposit
A barrier to securing a first home is often raising the deposit. A bigger deposit opens doors to more competitive mortgage which will save you money in the long run.
If you can afford it, you can gift the money to your child. The mortgage lender will likely ask your child to verify where the deposit has come from (to do with money laundering rules) and for you to confirm that it’s a gifted deposit with no obligation to repay the money.
If your child is buying with a partner you may wish to take steps to protect your gift in the event they split up. You can have a deed of trust drawn up by a solicitor – a simple document to spell out who the money was gifted to which means if they part ways, your child will retain ownership of that amount. You can also specify what happens to the money if the property is sold.
Should you be helping with the deposit on the basis it’s a loan and you intend for your child to repay you, this deed of trust is also a good way to formalise that, so there’s no question further down the line that it was a gift.
A loan from parents would need to be declared to a mortgage lender and some count it as a debt for affordability calculations, so it could reduce borrowing power slightly.
Borrowing to fund a deposit
If you don’t have the luxury of dipping into savings to help your kids, there are ways of raising the cash to lend a hand.
There’s the option of a personal loan if it’s a modest sum.
For larger amounts you might explore a retirement interest-only mortgage where you raise cash using the equity in your home. You make monthly interest mortgage payments until you go into long-term care or die. The lender receives the capital they are owed when your own home is sold – there is no end date or term.
A family or parent offset mortgage
A family offset mortgage is where you link your savings to a child’s mortgage to help them qualify for a better mortgage rate.
Like a standard offset it means you pay interest on the balance of the mortgage minus the savings.
Harris says: “Handing over a large lump sum to put towards the deposit might not be a sensible long-term plan if you might need that money yourself at a later date. In this situation, a family offset style arrangement such as Barclays Family Springboard might be a better option.”
The Family Springboard lends the borrower 100% of the property value while a ‘helper’ provides a 10% contribution held in a special account for five years which reduces the ’net’ loan-to-value.
A guarantor mortgage
If your child doesn’t quite earn enough to get a mortgage alone for the property they want to buy, parents can use their savings or their home as security for a guarantor mortgage.
Typically they would guarantee 75% or 80%, although it can be up to 100%, which avoids the need for a deposit. This means agreeing to cover the mortgage repayments if your child could no longer afford them.
You’ll need to be happy to declare your income and spending details to support the mortgage application.
Joint borrower sole proprietor mortgage
A joint borrower sole proprietor (JBSP) mortgage allows up to four people to be named on the loan, with only one being the property’s actual owner (proprietor) and named on the deeds.
A JBSP mortgage works in a similar way to a standard mortgage. Affordability is assessed based on the income of all borrowers, meaning your child can afford a larger mortgage than if they just used their own income.
The difference with a JBSP mortgage to a standard joint home loan is that the names on the mortgage aren’t all on the deeds, which is preferable for wealthier parents who don’t want to add to the value of their estate and to avoid paying the extra stamp duty charged on second homes.
Harris adds: “As more lenders move to a JBSP model, guarantor mortgages have become less popular. While not available from every lender, the JBSP mortgage is growing in availability and there are many variables to consider. For example Hinckley & Rugby can be flexible for older supporting applicants by splitting the mortgage with differing terms.
“However, there are also the likes of Barclays, Accord, Metro, Skipton and Bank of Ireland who are worth a look, as well as a whole host of building societies and specialists such as Vida and Foundation.”
Joint mortgage
Combining incomes can increase the size of mortgage you can take out, which can help the borrower access more mortgage deals.
When taking a joint mortgage, you need to decide how ownership of the property is defined legally.
You can be a joint tenant where you jointly own 100% ownership of the property, or you choose to be tenants in common and specify what share of ownership each has.
If going down this route you may want to consider the tax implications of stamp duty – existing homeowners have to pay a second home surcharge of 3% on the standard stamp duty rate – and capital gains tax when eventually the place is sold.
New home schemes
If your child wants to live in a new development then it’s worth looking out for special deals targeted for those with parents who plan to help.
For example Persimmon runs the ‘Bank of Mum & Dad scheme’ which means that if a parent (or family member) contributes 5% or more towards the price of a home, they'll reward the parent with £2,000 after completion.
Estate planning
When it comes to gifting money to children, it’s important to bear in mind the implications for potential inheritance tax. Whether a cash gift will be considered part of your estate when you die will depend on who you’ve given the gift to, how much the gift was worth and when the gift was given.
The money will be tax-free as long as you live for seven years after the gift. There are also certain exemptions for gifts each year that might help you avoid inheritance tax liabilities if you’re planning to help with a deposit.
The annual exemption allows individuals to gift £3,000 every tax year. If you don’t use any of this in one tax year then you can add it to the next tax year and have up to £6,000 to give away but you can only carry forward it for one tax year. So a couple could hand over £12,000 to a child in one year without inheritance tax considerations. You can also hand over up to £5,000 for a child’s wedding present.
Malcolm Steel of independent advice firm Mearns & Company says: “Many parents will be actively looking to pass on some of their wealth to the next generation while they’re still around to enjoy it. As well as helping out loved ones with a place of their own, they’re able to reduce the size of their estate and therefore minimise inheritance tax bills further down the line.”
Steel highlighted the importance of factoring in the financial security needed for yourself.
“An adviser can help with cash flow modelling to measure the impact of any large cash gifts on your own finances to ensure it won’t leave you in difficulty,” he says.
As part of estate planning it might also be worth updating your will to reflect the gift that has been made.
It is always best to document gifts and to keep such paperwork in a safe place or with your solicitor.
Getting it right
Whichever of these options sounds appealing to you, it’s worth talking to a professional to make sure you take the right route.
If you’re parting with money to help with a deposit you might want to discuss estate planning and wills.
If you’re helping with a mortgage, you might want to speak to a broker who can make sure you have the right lending agreement to suit your personal circumstances.
It’s also key to understand the legal and long-term financial implications of taking on more debt if you’re so you might want to talk to a financial adviser to discuss estate planning and to update your will, if you have one.
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