How Can Parents Help their Children Onto the Property Ladder?
It can be really hard as a parent to watch your child struggle to get a foot on the property ladder. House prices are soaring, the cost of living has increased and saving up for a house deposit has never seemed so difficult.
But fear not! There are a number of different ways that you as a parent can help your child to buy their first home, from assisting with the deposit to entering into a joint mortgage.
Read on to find out all the ways you can help your child secure their first home.
Helping with a Deposit
There are a couple of different ways that a parent can help their child with a deposit for a mortgage:
Lending Your Child the Money for a Deposit
Parents can help their child onto the property ladder by lending them a lump sum to use as a deposit. Some parents will happily lend money interest-free meaning that it is a cheaper option than borrowing on credit.
Lenders usually require a letter from the parents making clear that they are lending the money for the deposit and outlining the repayment schedule as the lender may want to factor this into their affordability calculations when deciding whether or not to grant the mortgage.
Loaning rather than gifting the money means that the amount of money your child can borrow for their mortgage could be affected as the lender will take into account any loan repayments.
Also parents will have to pay income tax on any interest they charge on the loan.
Gifting a Mortgage Deposit
A parent can choose to gift their child a lump sum to use as their deposit. This can save a first-time buyer from having to spend years scrimping and saving to get together a deposit.
Many lenders require at least a 10% deposit to secure a home and considering the average house price in the UK in June 2021 was £266,000 then that would require a deposit of £26,600.
Most lenders ask parents to provide a letter clarifying that the money they are providing for their child’s house deposit is a gift and will not be required to be paid back. Parents may also have to sign a legal document making it clear that they have no financial claim on the property.
If your child is buying a property with someone else and you want to make sure your gift only benefits them you can have a legal document known as a deed of trust drawn up. This can ensure if the house is sold in the future the money you gifted to your child is not split with the person they entered into a joint mortgage with.
It is worth being aware that if both parents should die within seven years of making the financial gift of a deposit then the child may have to pay inheritance tax on it.
Find out more about mortgage deposits and Gifted Deposit Letters in our blog.
Can I Use an Equity Release Mortgage to Help My Child to Buy a Home?
Yes. Parents can release some of their equity in their own home via an equity release product known as a Lifetime Mortgage.
This can be a way for parents to give their children their inheritance early as the amount they borrow from the value of their home will be paid off when they die.
Find out more in our guide to equity release mortgages.
Family Offset Mortgage
Family offset mortgages are a way for parents to help their children to buy a house without actually spending any of their money. Instead they offset the value of their savings against their child’s mortgage.
The parent’s savings are placed in an account linked to their child’s mortgage which means that the child will pay less interest on their mortgage as the savings amount offsets the interest.
This does mean however that the parents will not receive any interest on their savings.
Most family offset mortgages require the parents to commit to leaving their savings locked into the account for a set period of time, for example until their child has paid off 30% of the mortgage debt.
Parental Mortgage Guarantees
Another way to help your child to buy their first home is to act as a guarantor on their mortgage. This is a specific type of mortgage product which allows parents or other close family members to use their savings or property as security against the loan.
However should your child be unable to meet their monthly mortgage payments for whatever reason then you as parents could become liable for the loan, potentially putting your own property at risk.
Guarantor mortgages sometimes come at higher rates of interest than standard mortgages.
Before considering taking on this type of product make sure you speak to a qualified mortgage advisor so you understand all the associated risks.
Getting a Joint Mortgage with your Parents
Another option for parents wishing to help their child to buy a home is to enter into a joint mortgage with their child. This can help your offspring to secure a bigger mortgage as both yours and their own incomes will be considered when deciding how much they can borrow.
A joint mortgage does mean that both parties named on the mortgage will own the property.
Additionally the stamp duty surcharge means that the joint mortgage on your offspring’s property will count as a second home. This means paying an extra 3% in stamp duty.
Another consideration is that if the property is sold while you still jointly own it then you might have to pay Capital Gains Tax on any profits.
Joint Borrower, Sole Proprietor Mortgage
This is a type of joint mortgage where a child can secure a mortgage with their parents but only the child is listed as the sole owner of the property.
This means you as parents will have the joint responsibility of paying off the mortgage (and will be liable for payments if your child can no longer make them) but you have no legal claim on the property.
Joint borrower sole proprietor (JBSP) mortgages were originally designed as a way to help get young people onto the property ladder. Their parents could temporarily help with mortgage payments until the end of a set period when hopefully they could withdraw leaving their child to cover the monthly payments alone.
The withdrawal can be factored in slowly so if your son or daughter has started work on a modest salary but expects it to increase in the coming years they could go into a JBSP mortgage with a parent or family member who could pay in less and less over time until their offspring was able to pay the mortgage independently.
JBSP mortgages could also be helpful to those with a poor or non-existent credit score as their parent’s credit history is taken into account when granting the mortgage. Once they have been making regular mortgage payments then the child’s credit score will build up.
The key difference between a joint mortgage and a joint borrower sole proprietor mortgage is ownership. With a joint mortgage with your parents both parties will share ownership of the property. With a JBSP mortgage the parent’s name will not go on the property deeds. One of the benefits of this is that as the parent does not own the property they will not be liable for any stamp duty surcharges (an additional 3% stamp duty charge is usually levied on second properties).
What Are the Risks of Helping my Child Buy a Home?
Before considering helping your child to buy a home you should think very carefully about your own financial security and whether you can afford to gift or loan money to your offspring.
Consider whether you might need the money you have gifted to them in the future. If you may need to ask for it back this could cause them to have to sell their home to repay you.
Equally if you or your child struggles to make joint mortgage payments at a future date then both homes could be at risk.
Speak to a qualified mortgage advisor to discuss your circumstances before you commit to helping your child with their mortgage.
Here at VA Mortgages we would be happy talk you through all the options so you can make the best decision for you and your family.
Fill out the form below for a no obligation discussion about your circumstances: