Help Your Children Get Onto The Housing Ladder

You raise them, watch them grow up and would do anything to try to give them the opportunities you never had. But should that extend to giving your kids a leg-up onto the housing ladder?

Life for the first-time buyer has never been easy, but even now when house prices are more realistic, buyers have to raise larger deposits or are having difficulty qualifying for a mortgage at all.

So is the answer in the ‘bank of mum and dad’? Over the years we have benefited enormously from inflated housing prices, with many people making excellent profits from property sales. Parents are often in an excellent position to spread a bit of that wealth around and use their experience of the housing market to help their offspring.

If you are a parent who is considering helping your children to become a homeowner there are numerous options to consider.

Pay the deposit yourself

Most lenders are now reserving their best rates for those with deposits of around 30% of the property’s value, so it’s easy to see why many first-time buyers are being priced out of the market.

Parents giving their children some or all of the deposit is now a common solution to this problem, and the fact that interest rates are so low at the moment means many feel it is more worthwhile using their nest egg to help their offspring.

However, it is worth noting that some lenders will be uneasy about you lending your children money, as technically this impacts their ability to afford the loan.

You need to ask yourself whether you can genuinely afford to give the money away – both now and in the future. If you need to borrow money in order to help your children then you should first consider seeking impartial financial advice.

Finally, if your child is buying the property with another person or spouse you should seek legal advice so you know what would happen if the relationship broke down or one party wanted to sell the property.

Become a guarantor

If the deposit isn’t an issue, but your child is still struggling to borrow enough for their first home you could consider becoming a guarantor. This means that if your child is unable to pay the mortgage you will become liable for payments and that the lender can chase you.

If your child defaults on the payments this could affect your own credit rating and your ability to borrow in the future.

It is again worth considering whether you can afford to take on this commitment for the whole term of the mortgage – usually 25 years – but there are options if this is a concern.  In a worst case scenario the property could be let out to ensure mortgage payments are met until circumstances change or the property is sold.  This would usually require the lenders consent, though most lenders are currently agreeable to this should the need arise.

In any event, it is best to seek the advice of a professional to weigh up all your available options.

Use your savings to offset their mortgage

If you want to help your child keep the cost of their mortgage down and have cash in a savings account of your own, you may consider an offset mortgage deal.

Here the mortgage is linked with your savings account. The lender deducts the savings from the amount owed and interest is only charged on the difference. This arrangement benefits higher rate tax payers because the usual 40% tax on their accrued interest in a savings account would not apply with the offset scheme.

Parents should be prepared to tie up their money for at least three years – possibly more if the property value falls – and some lenders take legal charge of the savings, using it as security should the child defaults on the mortgage.

Buy together

You could take out a joint mortgage with your child sharing responsibility for making the repayments, putting all the relevant names on the deeds. Alternatively you could help out by making monthly contributions to your child’s repayments, although lenders will not consider this as part of your child’s income.

You should still take measures to protect yourself legally and financially, making sure you know all the terms of the agreement. Consider what would happen if you or your child dies and seek impartial advice about the right sort of ownership method that works best for your circumstances. 

If you are ‘tenants in common’ (both owning a stated share of the property) then the deceased person’s share passes to their estate and can be claimed by their benefactor or creditors. If you choose to be ‘joint tenants’ (i.e. you own the whole property together) then the deceased person’s share passes to the surviving owner.

Become their landlord

The final option could be to buy a property and allow your child to live there rent free or otherwise.

Many parents do this when their child goes to university, but a buy-to-let property should be seen as a long-term investment, particularly as it often means taking on more debt in later life. If your child moves out you may be left with no option but to rent the property to strangers, taking on the role of landlord and all the potential advantages and disadvantages that brings.

 Obtaining a buy-to-let mortgage is also not as easy in the current climate – fewer lenders are offering this type of mortgage and the rates offered currently are less attractive than they were.

If circumstances allowed, a better option would be to obtain a ‘dependent relative’ mortgage. The real benefit of this is you would be able to obtain more attractive rates and terms.  To do this the lender would need to be satisfied you could meet this obligation and your own mortgage (if applicable) from your income.

With both these options it means you will have a second property and you should consider tax implications, such as income tax on any rent you receive and capital gains tax  should you decide to sell. The net value of the property will also be counted as part of your estate for inheritance tax purposes.

With all of these options, it is essential that you obtain impartial financial advice so you can choose the one that best suits your circumstances.

TWP Wealth Management can advise on any of the matters above. For more information contact 01932 704 700 or info@twpwealthmanagement.co.uk

Your home may be repossessed if you do not keep up repayments on your mortgage.