How to help your child onto the property ladder

According to Dataloft and the Ministry Housing Communities, the average UK house price has risen by over 42% in the last decade, so it’s unsurprising that first-time buyers are finding it harder than ever to save enough money to hop onto the property ladder. However, for those fortunate enough, there’s the option of turning to the Bank of Mum and Dad – according to research by Legal & General, 25% of mortgage transactions a year are funded by parents, making the Bank of Mum and Dad the 12th biggest lender alongside banks and building societies!

How can I help my child buy a home? 

There are many ways you can help your children buy their first home:

• A financial gift (deposit)
• A loan
• Putting your savings into a linked account
• Acting as a guarantor on a mortgage
• Getting a joint mortgage
• Looking into new ‘springboard’ mortgages

Should I get financial advice before I help my child to buy a home?

Financially assisting your child in buying a home is a huge decision. So, if you are thinking about it, make sure you think things through first. Research from Legal & General found that 17% of over 55s were enduing a lower standard of living as a result of helping their children onto the property ladder.

Before you get involved in your child’s house purchase, we would strongly advise you get independent financial advice. An IFA can help you work out exactly how much assistance you can realistically afford to give, whilst still allowing yourself a good quality of life.

Can I gift my child the deposit they need to buy a home?

Most parents choose to give their children the gift of cash to help boost their deposit and propel their borrowing power so they can access a cheaper mortgage deal.

Most banks will accept a deposit that has been gifted (or partly gifted) but they may ask for written confirmation from you stating it is a true gift. There are two reasons for this. Firstly, for affordability calculations, they want to know the money isn’t a loan that will require regular repayments. Secondly, they want to know that if the worst came to the worst and they had to repossess the house, you don’t have an interest in the property.

Are there any tax implications to gifting money?

Neither children or parents will have to pay any immediate tax on money gifted to them from the Bank of Mum and Dad.

However, an inheritance tax bill could be demanded later down the line, depending on how your personal circumstances change. Everyone is allowed to gift up to £3,000 a year without it being added to the value of your estate for inheritance tax (IHT) purposes. You are also able to carry over any unused allowance from the previous year. As a result, two parents could gift their child £12,000 without IHT being a problem if they hadn’t gifted any other money to anyone in the previous two years.

If you want to give more than that – or for some other reason don’t have your full annual inheritance tax allowance to play with – then the money could be liable for IHT.

If the person gifting the money was to die within seven years it would still be classed as part of their estate for IHT purposes. This means if their total estate, including the gift, is worth more than £325,000 then up to 40% tax would be due on the excess.

The amount of tax due on the gift decreases as the seven years elapse. How much tax is due on the gift will depend on how many years have passed since it was handed over.

You can find out more about this, here.

Getting a loan from your parents to buy a house

It may be that you can’t – or simply don’t want – to gift your child money to help them buy a house, so another option is to lend them the money.

It is relatively straightforward to draw up a loan agreement. This should set out the interest being paid on the loan and when it needs to be repaid – for example when the property is sold. You should also include what happens to the money if anyone involved in the loan dies, or if the parents need the money back.

Just be aware that a loan would need to be declared to a mortgage lender if one is being involved in the purchase. This could have major implications for a mortgage. A loan could affect mortgage affordability calculations as lenders will factor any repayments on the loan into the child’s outgoings.

Some banks won’t accept a borrowed deposit as the money comes with strings attached. It will limit the number of deals your child will be able to apply for.

To make sure your child gets the best mortgage deal on the market, get advice from our mortgage experts at Leaders Mortgage Services.

Alternatives to a gift or loan

If you can’t afford to give your child a lump sum of money, there are other options worth considering:

1. Equity as security

You can use a portion of the equity in your home as additional security against the loan. So, if your child takes a loan for 100% of the property, you can use the value of your home as security against 25% of the loan.

If nothing goes wrong, it shouldn’t cost you anything. But if they are unable to keep up with repayments and they default on the mortgage, you would be liable for a portion of the loan. This could put your own home at risk.

2. Savings as security

There are a few offset mortgage deals available which allow for parental savings to be offset against a child or family member’s mortgage – these are known as Family Offset Mortgages. This reduces how much interest your child would pay. The main drawback is that you cannot access your savings until the term is up. But read about whether an offset mortgage is right for you in our guide to offset mortgages.

3. Guarantor mortgages

A guarantor mortgage is a product where you, as a parent or close relative, act as a guarantor for 100% of the mortgage debt. Essentially, you are agreeing to cover the mortgage payments if your child fails to do so.

The guarantor can be removed from the mortgage at a later date if your child can prove they are able to take on the debt by themselves.

Guarantor mortgages have been phased out in recent years, but they haven’t completely vanished from the market yet.

4. Buy a property with your child

You could take out a joint mortgage with your child, making you equally liable for the repayment of the loan. The upside is that with your combined incomes, you may be able to afford to take on a larger loan.

The big drawback to this plan is the additional stamp duty rate. If you already own a property, then your child’s new home would count as a second home. This means there would be an additional 3% stamp duty due, which could make the property significantly more expensive.

Plus, if it is your second home and you are still on the mortgage when the property is sold, there may be capital gains tax (CGT) liabilities. Some lenders will let you take on a joint mortgage, but your name doesn’t have to be added to the property’s title deeds, allowing you to sidestep these tax problems.

And finally, the advantages and disadvantages of the Bank of Mum and Dad

Gifting money to help your child buy a house can be wonderfully generous, but it can throw up some problems. Here are the pros and cons to using the Bank of Mum and Dad.

Pros

• A tax-free gift. Provided the parents live for seven years after the gift, the money will be tax-free. It also helps parents reduce the size of their estate, which can reduce a future inheritance tax bill.
• Lower monthly repayments. The Bank of Mum and Dad can help people put down a bigger deposit on their first home. This means they can borrow less and possibly get a lower interest-rate, which means lower monthly repayments.
• A better home. By helping boost the deposit, the Bank of Mum and Dad could help their child buy a better property. whether it is a slightly bigger home or in a better area, this could mean your child doesn’t need to move again in a couple of years. This could save them thousands in the cost of buying and selling property.
• Better mortgage choices. A bigger deposit can open up the mortgage market with more deals to choose from.

Cons

• Reduced mortgage options if loaning rather than gifting. Loans from the Bank of Mum and Dad can have repercussions on your mortgage. Some lenders won’t accept lent deposits as it means someone else has an interest in the property.
• Additional information from lenders. Mortgage lenders, estate agents and solicitors can all request to see proof of funds. Parents can have to show evidence of where the money they are gifting has come from. This can mean presenting numerous bank statements and certified ID.
• Relationship breakdowns. These days most people buy a home with a friend or partner. In the event of that relationship breaking down, you could find your child’s ex waltzing away with half of your money. Prevent this by getting a deed of trust drawn up.
• Family friction. If the Bank of Mum and Dad lends to one child in a family it can cause friction with other children which overshadows their relationship forevermore.
• Smaller savings. Gifting money to your children could leave you struggling in the future. Before you open up your own branch of the Bank of Mum and Dad, assess your own finances and work out how you can afford to help.

Ready to speak to one of our property professionals? For property market and mortgage advice, contact your local Leaders team, here!