With house prices at an all-time high, many first-time buyers are struggling to find their way onto the property ladder.
Fortunately, whether you’re a first-time buyer in need of assistance or a parent looking to help your child, there may be strategies you can use as a family to get that first home.
Here are five ways parents can help their children onto the property ladder.
1. Gift money towards a deposit
The first and most obvious way parents could help is by gifting money directly towards the property. Parents can provide a lump sum towards the deposit, enabling the borrowers to take out a mortgage for the remainder.
If you’re a parent planning to gift money, just remember that there could be Inheritance Tax implications if you die within seven years of making the gift and the value of your estate is more than £325,000 (£500,000 if you own your home).
There is an annual gifting exemption that allows you to gift money which immediately falls outside your estate. For 2020/21, the exemption is £3,000 for an individual, or up to £6,000 as a couple.
As a buyer, that means your parents could gift you money toward a deposit, potentially even up to the full amount.
Parents need to be sure they don’t overstretch themselves and give more than they can afford. If you want to gift your child money, thoroughly interrogate your finances, and make sure you aren’t sacrificing your quality of life by giving away money you need to live.
2. Give money as a loan that’s paid back
If gifting would make everyone involved uncomfortable, or you can’t afford not to have that money back as a parent, you could also lend money.
This can work just like any loan: parents give a lump sum to their child that they use towards their home. They then pay the loan back in instalments, perhaps with interest if that’s what you’ve agreed.
It may be worth setting up a loan agreement so you’re all clear on the amount, length of time and any interest payable.
A loan agreement can help provide documented proof that this was a loan and not a gift, in case of IHT issues. It can also include instructions for what happens if you’re buying with a partner who you then split up from while you’re repaying the loan.
Just as with gifts, make sure you aren’t overstretching yourself by loaning to your child, especially if you need the money back.
3. Act as the guarantor on a mortgage
If you can’t afford to gift or loan money to your child, you could consider being the guarantor on their mortgage.
As a guarantor, you essentially pledge to make repayments on your child’s behalf if they fail to make them, offering your savings or home as security against the loan.
This could allow your child to borrow up to 100% of a property’s value, with the deposit replaced by whatever collateral you choose to put up.
A guarantor mortgage can be useful if your child is on a low income, has little to no deposit, and bad or no credit history.
However, bear in mind that this could make you liable for the cost of your child’s mortgage if they fail to make repayments. You’ll typically be liable both for the monthly repayments and the total amount outstanding on the mortgage.
The lender may have taken a charge over your home, too. That means, if you fail to make repayments on your child’s behalf, you could lose your own home.
4. Use an innovative mortgage scheme
There are other mortgage schemes that function in a similar way to a guarantor mortgage that can allow you to lend a deposit to your child, but also get it back.
For example, the Barclays Springboard Mortgage scheme lets parents help with the deposit for a new home, while still retaining access to the funds.
Parents can put 10% of the value of the loan into a designated “Helpful Start Account” where it’s “locked” for five years. The child can then borrow the full purchase price of the home because the helper is providing 10% security for five years.
If mortgage payments are kept up over the five years, parents’ savings will be released back to them, including the interest that accrued.
However, as with a guarantor mortgage, parents may lose their savings if the buyer doesn’t make their repayments.
If you’d like help finding a mortgage like this, please do get in touch with us.
5. Take out a joint mortgage
If you don’t like the idea of putting your home at risk as a guarantor, a parent and a child could consider a joint mortgage.
A joint mortgage allows you to include parents’ income with a borrower’s, making you more likely to meet affordability checks. This can potentially increase the size of the loan available, as well as the range of mortgage deals, giving you a wider choice.
The downside to this as parents is that your names are on the mortgage. As you likely already own your home, this could count as your second property. This may make you liable for the additional Stamp Duty or Land and Building Transaction Tax (LBTT) charged on a second home.
Alternatively, you could avoid Stamp Duty or LBTT by using a “joint borrower, sole proprietor” mortgage arrangement.
This type of scheme works in a similar way to any other joint mortgage, but there are two key differences:
- Only the top two incomes are taken into account
- Only the borrower’s name goes on the mortgage, while parents’ names do not.
This type of mortgage means parents can still help support affordability checks as the lender will include their incomes. It also means they don’t necessarily have to pay any money upfront, and they won’t be subject to the second property Stamp Duty or LBTT surcharge.
However, the risk to you as a parent remains the same if your child fails to make repayments – you are still responsible for the mortgage payments and the full outstanding balance.
This type of arrangement is relatively rare in the market. If you think this is the right mortgage for you, but you’re not sure how to go about finding one, speak to a mortgage adviser.
Get in touch
If you’d like to know how you could help your child to buy their first home, or you need assistance finding the right mortgage deal for you, please get in touch with us.
We can offer personalised mortgage advice that can help you get you on the first rung of the property ladder. Email [email protected] or call 0131 339 2281.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Buy-to-let (pure) and commercial mortgages are not regulated by the FCA.
Think carefully before securing other debts against your home.