Property prices and the cost of living are at an all-time high, so saving to buy a house can seem daunting for first time buyers. In fact, research from the Resolution Foundation shows that millennials are the first generation ever to be worse off financially than their parents.
In an effort to save, more young people than ever are still living at home, with new data showing that more than a quarter of people aged 20-34 are still living at home with their parents.
Parents will likely want to help their children fly the nest at some point, and many are reaching into their own pocket to give them a boost onto the property ladder. In fact, an estimated eight out of 10 under-30s now rely on help from parents to buy their first home.
The so-called Bank of Mum and Dad is the only way many first time buyers can feasibly buy a house. A report from Legal & General found that the “bank” of Mum & Dad will support the purchase of £75billion worth of property in UK in 2017, making it the equivalent of a top 10 mortgage lender. But what is the best way for parents to financially help their children buy their first home?
Gift vs Loan
One of the most popular ways for parents to help out is to give them money towards their deposit on the property. This is a great help as this initial down-payment can then help the first time buyer to get a better rate on their mortgage.
According to Which? national property survey, more than half of first time buyers put down a deposit of 10% or more towards their first property, with the average first time buyer deposit being 17%. The average price of a first home is around £200,000, so a 10% deposit would be £20,000.
But one vital thing that parents need to decide is if their money is going to be a gift or a loan. Mortgage lenders will look more favourably on money that is gifted, as it is one less loan that the home owner has to pay back in the long run. If the money is a gift, then a letter should be written by the account holder declaring that the money is a gift and they have no expectation of being paid back or having any financial interest in the property.
Beware: a gifted sum can be subject to inheritance tax. If the parents die within seven years of giving their child the money, the money will still be treated as part of their estate and the child could be taxed. Hopefully this is an unlikely scenario, but you can avoid having to pay tax on any money from your parents, so long as it is £3,000 a year or less. So, for example, over the course of five years, you could give your child £15,000 in £3,000 installments and should the worst happen, they would still be exempt from inheritance tax. It’s also worth noting that in the year that your child is getting married, you can give them up to £5,000 – bonus!
If your finances are tight and you would rather loan your children the money, then you can draw up a loan document with your solicitor. The condition of the loan could either be for your child to pay you back with interest each month (obviously less than lenders are charging, otherwise they may as well just borrow the money from a bank) or create a deed of trust, which means that you will get the amount you have loaned back when the property is eventually sold.
Act as a guarantor
Some parents may really want to help their child out with their deposit, but not have enough in their savings. One solution to this is a guarantor mortgage whereby parents put their own house up as collateral on their child’s mortgage – the loan on the property is essentially underwritten by the parents.
This means that if the child fails to make their mortgage repayments, then the guarantor would have to remortgage their own home to cover the costs. Hopefully your child will be responsible enough to make the payments, so this worst-case scenario should not arise, and you won’t have to pay any money. A guarantor mortgage means that your child can borrow a higher amount, which can be helpful if they have a lower income or a poor credit score.
Offset your savings
Another way for parents to help their children get on the property ladder without directly giving them the money is by offsetting their savings against the child’s mortgage. The advantage of this is that, like a guarantor mortgage, you don’t have to physically give any money away: the funds are held in a bank account as collateral.
After a fixed period of time, usually around three years, the bank will release the money back to the parents with interest. So the money effectively acts as a deposit on the new property which means this is a good option for first time buyers who are struggling to get a deposit together. The bank will only retain the money in the account if the child fails to make a payment on the mortgage.
Encourage them to save
Parents aren’t the only ones who can help out first time buyers: the Government have schemes in place to help young adults’ savings work harder. Rather than going out for another brunch of avocado on toast and buying yet another triple venti soy latte, encourage your children to put more of their money into savings accounts.
There are several affordable housing schemes in place to help people save for a home and purchase a property. Visit https://www.ownyourhome.gov.uk/schemes-all/ for more details on all the Government schemes summarised below:
Help to Buy: Equity Loan
If you want to own a newly built home in England, you could borrow up to 20% (up to 40% in London) of the purchase price from the Government. You’d only need a 5% deposit and your mortgage would make up the rest.
Help to Buy: ISA
If you’re saving towards your first home, a Help to Buy: ISA will boost your savings by 25% when you save up to £200 a month.
Right to Buy
If you’re a council tenant in England the Right to Buy scheme could help you buy the home you rent with a discount of up to £78,600 (£104,900 in London).
Help to Buy: Shared Ownership
If you can’t quite afford to buy 100% of a home, you could buy a share of your home instead and pay rent on the rest.
Starter Home Schemes
30 local authorities in England have recently launched the starter homes scheme where you will receive a 20% discount on new-build homes in the area. Authorities include Bristol City Council, City of Lincoln, Greater Manchester Combined Authority, North and South Somerset Council, Plymouth City Council and Worthing Council. For the full list of authorities head here.
If you’re thinking about helping your child out with their deposit or mortgage to buy a property, speak to the lender or mortgage broker and a solicitor to find out what option would be the best for you based on your personal finances: everyone’s situation is different.