Parents can play a crucial role in helping kids get a foot on the property ladder.
At a glance
- It’s tough for first-time buyers to get a foot on the property ladder. But parents can help
- You could, for example, contribute to your child’s mortgage deposit through gifting, loan the money for a deposit, take advantage of a family offset mortgage, act as a mortgage guarantor, or apply for a joint mortgage
- Before entering into any commitment, though, get a financial health check and legal advice to understand the tax implications and any impact on your own future prospects
Plenty of young people dream of owning their own home. But for many, it’s a goal that can seem impossible to achieve. Rising house prices, student debt and job insecurity make it tough for first-time buyers in their 20s and 30s to get a mortgage – and a foot on the bottom rung of the property ladder.
Most parents are more than happy to provide financial help, of course – and while it’s natural to want to give your adult kids a boost into property ownership, it’s also important that you carefully consider the best way to support them.
It’s crucial, for example, to be aware of the tax implications of gifting or loaning money to your kids – and any knock-on impacts on your own financial security and retirement prospects.
Before you commit to a course of action that could have long-term consequences, then, it’s a good idea to talk with a financial adviser. They’ll be able to walk you through all of the options available to you – some of which we’ve outlined below – and how the numbers stack up.
How can I help my child buy a home?
There are several ways parents can help their children buy their first home:
- Helping to provide a mortgage deposit – through gifting
- Loaning them the money towards a deposit
- Offsetting the value of your own savings against a mortgage
- Acting as a guarantor on a mortgage – or applying for a joint mortgage
Helping your child with a mortgage deposit
One of the most important factors in being approved for a mortgage is having a deposit. The bigger the deposit, the better the deal in terms of interest rates and charges.
Few lenders offer 100% mortgages, but most require at least a 5% deposit – and the better deals are available to people who can put down at least 10% of the property purchase price.
The most competitive mortgages are generally available to buyers who have a 25% deposit – in other words, who are looking for a 75% mortgage.
So, if you can afford it, giving your children cash towards a mortgage deposit is one of the most helpful things you can do to assist them in getting on the property ladder.
There are tax rules around gifts, though. You can give up to £3,000 each year tax free. If you don’t use all or part of your £3,000 allowance in one tax year, then you’re allowed to carry it forward to the following tax year (but not subsequent ones).
This means that a couple could together conceivably gift £12,000 to a child, tax free, in a single tax year – but only if they had made no gifts to that child in the previous tax year.
For amounts above £3,000, there are tax implications.
Whatever the amount, it should always be clear that the gift is not a loan – and that you do not require the money to be paid back. Some mortgage providers may ask you to clarify this in writing.
It’s also worth noting that any sums gifted may be affected by a tax rule known as a Potentially Exempt Transfer (PET). Under PET rules, if you make a gift but die within seven years, the money may become liable for Inheritance Tax (IHT).
Your financial adviser can give you more information about this and the impact it could have on your finances – including the importance of writing a will and minimising your tax bill around IHT.
Providing a loan to your child
You can provide a loan to your adult child to help them buy a house. However, this complicates the mortgage application.
In the event of the house or flat being repossessed by the lender, you’d have a claim on the money, as well as the bank or building society who provided the mortgage. This makes it riskier for the lender – and it may mean that some lenders won’t want to provide a mortgage for buyers in this situation.
Generally speaking, lenders are more reluctant to offer mortgages when the deposit is funded by a loan rather than a gift.
An alternative might be to help to pay the monthly mortgage instalments with a loan that would need to be repaid by your child later.
Again, you’d need to make this clear in writing, detailing whether your child had to pay you any interest on the money and what would happen if anyone involved in the loan died.
This is particularly important if your child is buying with someone else.
For example, you would not want a situation where you had loaned or gifted money to your child and their partner, who then split up, sold the house – and found themselves in a dispute over who was entitled to any potential equity in the property (which was originally your money anyway).
Using your savings (without gifting them)
Another option is to offset the value of your own savings against your child’s mortgage. The child will pay less interest as a result.
This would be via a family offset mortgage. The amount of savings within the account is offset against the sum being borrowed for the home loan.
Interest is calculated daily, and the more savings that are held on deposit, the lower the mortgage debt in real terms.
This could enable your child to pay off the mortgage more quickly, or keep the mortgage term the same and benefit from lower monthly repayment costs.
Once your child has paid off a reasonable chunk of the capital sum of the mortgage, you could withdraw your savings. This would mean you get your money back – while your child would only need to have a 70% or 85% mortgage.
The drawback of this is that you will not receive any interest on your savings while they’re in the offset mortgage account. Furthermore, if you make any withdrawals from the savings account on which the mortgage is linked, the mortgage payment amount will increase proportionately.
Becoming a guarantor on your child’s mortgage
Parents can act as guarantors if they’re unable to help with a deposit payment. Sometimes, this enables your child to get a 100% mortgage.
However, there’s a risk to you in taking this route. The mortgage company will require a charge to be placed against the asset that you are using as a guarantee – which is usually your own home.
This means that if your child misses their monthly mortgage repayments, the lender could potentially force you to sell your house.
For this reason, it’s very important to take legal and financial advice before you enter into this type of contract. It’s also unlikely to work unless you have paid off your own mortgage in full.
Take out a joint mortgage with your child
Parents can choose to purchase a property with their children – by taking out a joint mortgage.
This could enable your child to buy a bigger or more expensive home than they would otherwise be able to afford on their own.
However, there are tax implications in going down this route. You’d need to take out a second mortgage, which could mean that you would have to pay extra stamp duty when you buy.
In addition, the property would most likely be classed as your second home. While you do not have to pay any Capital Gains Tax (CGT) when you sell your first home, you might be liable to CGT when you sell your second home, even if you don’t live in it and it’s your child’s main residence.
If your child gets into financial difficulty, it could also affect your own credit score and financial security in the future. Once again, it’s important to take advice before going ahead with this option.
Helping your child to save for a deposit
There are a number of ways in which you can encourage your child to save for a deposit and achieve their own financial independence:
- Draw up a spending budget. Cutting back on small things can make a big difference over time. Help them find a deposit or regular savings account where they can hold their spare cash
- Encourage them to get their finances in shape. A lender will want to see a minimum of three months of bank statements. If they can show they’re living within their means and saving regularly, it’ll reassure lenders that they have a good attitude to personal finance and are low-risk customers
- Teach them how to handle credit. Make sure they pay bills on time and don’t borrow too much – whether on credit cards or by taking out personal loans. Lenders will look at their credit history when they’re assessing whether to offer them a mortgage
Which type of mortgage is best?
There are a number of different types of first-time buyer mortgages – but generally, your child will need to choose between a mortgage with a fixed rate of interest, and one where the interest rate can change.
A fixed-rate mortgage is often the most popular option with first-time buyers, because it enables them to budget and plan for the future. Variable-rate mortgages can change over months or years, so provide less certainty – but may be cheaper overall.
Don’t forget to encourage your child to think about all the additional costs involved in buying and moving house – including the legal fees, mortgage brokerage fees, application fees, stamp duty, removal costs and new furniture and insurance for their home.
Other ways for your child to get on the property ladder
It may be that after talking to your child and your financial adviser, you’re not in a position to help your children financially.
This does not necessarily mean they cannot get a mortgage. Instead, they could consider applying for a 95% mortgage – the choice is more limited and interest rates are less competitive, but there are deals around.
You child could also consider a Help to Buy equity loan, which is a government scheme designed to help first-time buyers to get a mortgage with a 5% deposit.
Or they could look into the Starter Home programme – another government initiative providing around 200,000 affordable new-build homes to first-time buyers.
One further option is for your offspring to buy with friends – also via a joint mortgage. Their friends effectively become ‘mortgage mates’, who share the repayment costs between them. A number of lenders offer this option.
Need more help? Just ask
While it may be important to you to help your child onto the property ladder, it shouldn’t be at the expense of your own future prospects. Your financial adviser can talk through your options and help you with a money review, so that your finances are in the best possible shape for the years ahead.
The home on which the mortgage is secured may be repossessed if you do not keep up repayments on your mortgage.
The levels and bases of taxation and reliefs can change at any time. The value of any tax relief depends on individual circumstances.
We offer a comprehensive range of first charge mortgages from across the market, which lenders make available to mortgage intermediaries.
Will writing involves the referral to a service that is separate and distinct to those offered by St. James’s Place. Wills are not regulated by the FCA.
This article was provided to us by Geoff Day at Wilcox Day Wealth Management Ltd. Please note that this does not imply an endorsement by us.
You can review further articles that may be relevant, please visit www.wilcoxday.co.uk
Wilcox Day Wealth Management Ltd is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/about-st-james-place/our-business/our-products-and-services.