How to help get your child to climb onto the homeownership ladder
With rising property prices and stricter mortgage lending rules, homeownership has become an increasingly distant dream for many young people. For some, the solution lies in the financial support of their parents, often referred to as “The Bank of Mum and Dad.”
This informal institution has become one of the largest lenders in the UK, helping thousands of first-time buyers every year. However, while offering assistance can be incredibly rewarding, it demands a thoughtful and well-informed approach.
Helping your child get onto the property ladder requires consideration of financial, emotional, and even legal implications. Here, we explore the various ways parents can assist, the potential pitfalls, and the factors to ponder before making a commitment.
Gifting a deposit
One of the easiest ways to help your child is by gifting all or part of their deposit. This reduces the mortgage amount they need, often unlocking access to lower interest rates due to a higher loan-to-value ratio. For example, if your child is purchasing a home for £250,000 and you contribute £25,000 towards the deposit, this not only assists them in securing a mortgage but may also lead to more favourable terms.
However, you should be aware of the tax implications involved. Under current Inheritance Tax rules, this gift could be included in your estate if you pass away within seven years. To prevent any misunderstandings, it is essential to formally document the gift and provide a letter to the mortgage lender stating that it is non-repayable. This straightforward step can help avoid unnecessary delays during the home-buying process.
Acting as a guarantor
If you’re unable to provide a lump sum, becoming a guarantor for your child’s mortgage is another popular option. This means agreeing to cover their repayments if they cannot fulfil them. For example, if your child earns £25,000 a year and is unable to secure enough to purchase a property, adding your financial strength to their application could help them access a better mortgage deal.
That said, being a guarantor entails certain risks. You may be required to step in if your child misses payments or defaults on the loan. This could jeopardise your own financial situation and even affect your credit score. Before signing as a guarantor, ensure that you fully understand the agreement and its implications by seeking professional mortgage advice.
Joint mortgage arrangements
For families eager to take a more active role in the buying process, obtaining a joint mortgage can be an attractive solution. This allows parents to combine their income with their child’s earnings to secure a larger loan. For example, a parent contributing £30,000 in annual income could enable their child to borrow significantly more, making previously unaffordable properties a possibility.
However, this approach presents its complexities. Joint mortgages entail shared liability, even if the parent does not reside in the property. Furthermore, parents who already own their home might incur capital gains tax on their share if the property is sold at a profit. Ensure you fully understand the legal and tax implications before proceeding and consider consulting a solicitor to formalise the agreement.
Loaning the money
Loaning money to your child, rather than gifting it, can strike a balance between support and maintaining financial security. For instance, you could lend £15,000 for a deposit with an agreement that your child will repay the amount interest-free over five years. This helps them secure a home while allowing you to keep control of your finances.
To avoid potential disputes, always formalise the arrangement. Consider drafting a loan agreement that outlines the amount, repayment terms, and conditions, such as penalties for missed payments. While offering a loan can alleviate financial strain, think carefully about your child’s ability to repay and how this might affect your relationship.
Using savings or releasing equity
Another option is to use your savings or the equity in your home to fund your child’s purchase. Parents with substantial savings might choose to withdraw a portion for their child’s benefit. For example, accessing £20,000 from a high-interest savings account could provide the ideal deposit without the need to borrow. However, ensure that this withdrawal won’t affect your future plans or retirement goals.
Alternatively, some parents utilise equity release schemes to access funds tied up in their homes. Equity release enables homeowners to unlock cash while continuing to live in their property. For example, if your home is valued at £400,000 and you release £50,000, you could use this amount to support your child. This approach is ideal for those who are property-rich yet cash-poor, but it carries long-term financial implications, such as reduced inheritance for other family members. Always seek professional financial advice before considering equity release options.
Communicating with the family
Open communication is essential in any financial arrangement. Begin by having an open discussion with your child about their financial situation and your ability to help. Discuss areas such as how much you can contribute, whether siblings will receive similar support, and what expectations you may have regarding repayment.
For instance, one family agreed that the parents would lend their son £30,000 for a deposit, but clearly stipulated in the written agreement that he would repay half within ten years. This not only helped the son secure his home but also preserved family harmony by establishing clear boundaries.
Importance of professional advice
Regardless of your chosen route, obtaining professional financial or legal advice is crucial for assessing the risks and benefits of each option, identifying tax implications, and guiding you through the legal requirements. Seeking professional guidance will also safeguard your financial interests and alleviate the stress of the process.
A balanced approach
While the Bank of Mum and Dad can be instrumental in helping young people achieve their dream of homeownership, any financial assistance must be balanced with your long-term security. By exploring options, seeking advice, and maintaining open communication, you can make a meaningful contribution without jeopardising your future.
Are you ready to discuss how to help your child get onto the property ladder?
If you would like more detailed information, advice, or wish to discuss your family’s specific situation regarding how to support your child in getting onto the property ladder, professional guidance can significantly assist you in navigating this complex process. Contact Fitch & Fitch at 020 7859 4098 or by email at info@fitchandfitch.co.uk to discuss your requirements.