How To Help Your Children Get On The Property Ladder
What are the main reasons you may look to help your children or grandchildren get on the property ladder?
“Although low deposit options are gradually coming back into play, the continuing increase in house prices has led to a need for larger deposits, making saving for one even harder. Not to mention the financial challenges presented by Covid-19 thrown in, including redundancy, furlough, or reduced income. Parents or grandparents may choose to help their children or grandchildren for a number of reasons. This may include simply wanting to help them step foot on the property ladder or to gift money to help reduce their inheritance tax.” – Brian Murphy, head of lending at Mortgage Advice Bureau
What are some of the different ways you can help someone get on the property ladder?
“There are a number of options that can be explored that don’t necessarily start with giving a large chunk of money. We’re finding that some parents are delaying their retirement or cashing in pension pots using their tax-free cash to help their children. However, parents who do this may risk impacting their own retirement plans. Family Assistance Mortgages [such as the options below] take into account parents’ or grandparents’ finances and don’t require them to hand over large amounts of cash. Parents may jointly apply for a mortgage with their younger relative, so their income is included in the lender’s assessment and will increase the child’s borrowing potential.” - Paul Johnson, mortgage manager at St. James’s Place
How should you start assessing your own financial situation to decide whether this is something you can afford to do?
“First and foremost, ahead of committing to helping your children or grandchildren, it’s important to take time to reflect on your own goals and finances. The first step is calculating how much you can personally afford to share with others without it significantly impacting the way you want to live your life. The second, is to make sure you do the maths. When it comes to purchasing a home, there are always extra costs involved which you may not have accounted for such as Stamp Duty, a property survey and estate agent fees. It is essential to make sure all costs are considered before committing to gifting a financial sum.” – Anthony Ward, Barclays Wealth Management
Please can you explain a little bit about:
(a) Guarantor mortgages
“A guarantor mortgage allows a parent to use their own property as security to help young relatives. These guarantor mortgages come with their own risks, however – notably that, should a child miss their monthly mortgage payments, a lender could potentially force the parent to sell their own home. If you’re a parent or grandparent looking to help a younger relative buy a property, then it’s crucial that you take legal and financial advice before you enter into any type of contract. These types of mortgages have become less popular with lenders due to increased regulation. Only a few high street lenders now offer this type of mortgage.” – Paul
(b) Family offset mortgages
“A family offset account is a good solution when an older relative wants to help but does not want to gift money that they may later need themselves. A parent or grandparent can use a portion of their savings to reduce the homebuyer’s repayments to help them secure the mortgage. The savings may be deposited into an account that sits alongside the mortgage to reduce the deposit required and the monthly repayments, for example, by lowering the interest rate payable. In this case, the older generation keeps ownership of their investments and savings – and the ability to benefit from them in the future. However, terms and conditions apply, so independent legal advice should be sought.” – Paul
(c) Family deposit mortgages
“With a family deposit mortgage, you can borrow against the equity in your home to gift part or all of that money to a child/grandchild to support them with buying their own home.” – Brian
(d) Flexible family mortgages
“Flexible family mortgages are a combination of the above and can be tailored whereby they can offer both the option of offsetting interest or raising deposits or both.” - Brian
(e) Joint borrower sole proprietor (JBSP) mortgages
“This type of mortgage is becoming more popular and taking over from the guarantor mortgage. It allows parents or grandparents to go on the mortgage application with the son/daughter but not the property deeds. This means that a larger mortgage can be secured as the parents/grandparent’s income can be used for affordability. This is also tax efficient as the parents/grandparents will not be liable for the Stamp Duty surcharge on the purchase, nor Capital Gains Tax when the property is sold as they aren’t on the property deeds. The son/daughter also continues to qualify for the first-time buyer Stamp Duty land tax relief.” – Paul
(f) Providing extra mortgage security
“You may not have sufficient savings to use to offset against the mortgage, but you do have equity in a property. You could consider a charge being taken on your property instead of paying cash towards the deposit required on the young relative’s mortgage. This again means that a lower deposit is needed, and it reduces the monthly payment.” – Paul
ISTOCK/GEORGCLERK
And what about joint ownership – how does this work?
“Joint ownership in this case means both the parent/grandparent will jointly own the property with their child/grandchild legally. All will be liable for payments on the property and for making decisions about the property.” – Brian
Does having no credit history or a poor one affect your options?
“It can make it harder for your children to get a mortgage if they have no credit history and more complex if the parental history is poor. However, there are a number of specialist mortgage lenders who focus their lending on borrowers in these circumstances. Everyone’s situation is unique, and therefore a discussion with a mortgage adviser will quickly determine the feasibility or not of being able to obtain a mortgage at this time, and if not, they will be able to advise you of the best strategy to pursue to put yourself in the best position to obtain one in the future.” – Brian
“In this instance, it’s definitely best to speak to an adviser who understands the requirements of different lenders. Each lender will have different underwriting requirements and the way they look at credit history differs. While one lender may say no, there will be another who is happy to proceed with the mortgage.” – Paul
If you're looking to free up some cash, is re-mortgaging a good idea?
“It is something to consider but it will really depend on your own personal circumstances. You can approach your existing lender to see if they would lend you more money. The other option will be to speak to an adviser who will look at the pros and cons of this option for you, based on your personal circumstance. They will then look for the best lender to suit your requirements.” – Paul
“With every monthly repayment you make on your current mortgage, you are gradually shaving off more and more of your mortgage, and in the process, you’re building up the equity in your home. As the equity increases, you can remortgage and release some of the equity to put it towards other things, such as home improvements or, to help your children/grandchildren get on the property ladder. This can be an effective way to use money that would otherwise be tied up in your property. However, it’s important to speak to a mortgage adviser if you’re thinking of re-mortgaging as they will need to assess your personal and financial situation before making recommendations on what you can afford and how you can achieve your ultimate goal.” – Brian
Can you tell us about gifted deposits and how they work?
“If you make a direct gift to help your child or grandchild with a property purchase, this is often known as a Potentially Exempt Transfer (PET). A PET allows you to gift a financial sum of £3,000 or more and avoid inheritance tax. However, your relatives could be subject to pay Inheritance Tax if you live less than seven years from the date of making a PET. This could be up to 40% of the amount gifted. For that reason, it’s important to consider your exact tax position before handing over any financial gifts, and ensure your will is as up-to-date as possible.” – Anthony
“Gifted deposits are normally the source of the house deposit for a son/daughter. One point to remember is that it must be an outright gift. If it is classed as a loan from the parents to the son/daughter, then most lenders will not accept it to help as a deposit for a house. The lenders will ask for confirmation from the parents that it is being gifted. It is now a common factor that a son/daughter will have help from their parents to get onto the property ladder via a gifted deposit because the amount needed has increased over the years.” – Paul
What are the inheritance tax implications of going down this route?
“While there may be no immediate implications from gifting, any large amount could be subject to Inheritance Tax if the parent dies within seven years of making the gift.” – Paul
Is it a good idea to draw up a legal agreement between you and the children/grandchildren you are lending to/helping?
“It is worth considering, particularly if your son/daughter is jointly applying for the mortgage with a partner or friend. If the relationship breaks down, the partner/friend could potentially walk away with half the money you have gifted to your son/daughter. When drawing up the legal agreement, be careful of the wording and how the agreement is structed. The agreement should be with your son/daughter and the partner/friend not the parent or this may mean the lender will not lend and there will be tax implications for the parents.” – Paul
If you don't want to get involved with the deposit or mortgage, what are some of the other ways you could help them buy a property?
“There is lots of practical support you could offer. Research the mortgage process yourself (as you have been through the buying process already) and try to make sure they understand the full costs involved in buying a property. Some of the key expenses when buying a property are moving in and decorating. Why not hire a van for them and get stuck in with the decorating?” – Paul
“Instead of a gifting money for a deposit you may wish to consider gifting any surplus income that your child or grandchild could use to help pay for their mortgage or associated living expenses. Regular gifts can be exempt from Inheritance Tax if they are made from income, form part of your normal expenditure and are paid on a regular basis without impacting your own standard of living. If you choose to do this you may wish to seek tax advice before doing so, and it’s always a good idea to keep records of your gifts as your executors will need these in the future.” – Anthony
And what about saving some cash for them ahead of time – what’s the best way to do this?
“Again, this depends on personal circumstances and the timeframe you are looking at for an amount of money to be saved. The government’s lifetime cash ISA is a good starting point as it pays bonuses dependent on the amount of time it is kept going and the amount invested. This is a good option if you have a longer time horizon to save. Generally, it’s best to keep your money as liquid as possible and to be able to get it without penalty.” – Paul
“ISAs are an excellent way of investing for the future, given they allow you to contribute up to £20,000 tax free every tax year. However, if ISAs aren’t right for you given the current low interest rates, there are many investment vehicles that could also be advantageous to explore, such as Pensions and Offshore Investment Bonds. However, this is a complex area and if you are a beginner investor, make sure you take advice to help you understand your options fully.” – Anthony
Finally, if you decide it's not right for you to get involved financially, what are some key, helpful resources you could pass along to help your children or grandchildren?
“If you have a financial adviser, it is a good idea to get them to come in to talk to the family on the options available. Another good starting point is the St James’s Place first-time buyer guide which provides a lot of important information when you are buying your first property. A link to the guide can be found here.” – Paul
For more information or support in regard to financial planning, visit MortgageAdviceBureau.com, Barclays.co.uk and SJP.co.uk. You can find out more information about the Government Lifetime ISA here.
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