According to new research by Legal & General, one in four properties in the UK will be funded by the “bank of mum and dad” in 2020. With lenders rapidly withdrawing low-deposit mortgages for first-time buyers in response to the coronavirus pandemic and the ensuing recession, this trend seems set to continue. One in five family members helping a buyer to fund their first home has increased their contribution by 50% since the pandemic hit.
But unless you win the lottery jackpot or have secret millions tucked away in a savings account, how can you help your child buy their first home in the increasingly inaccessible UK property market?
Help Your Child Raise a Deposit
If you have savings and can afford to do so, gifting your child the funds to cover the deposit may be enough to give them the leg-up they need. Many people have sufficient salaries to afford the monthly mortgage payments on a new home but are unable to save up a big enough deposit — especially now that 5% and 10% deposit mortgages are becoming increasingly rare.
Most mortgage lenders will accept a cash gift as a deposit, but they will probably expect proof that you have the funds and are committed to gifting or lending them to your child. If the money is a loan, repayments will be factored into the lender’s affordability calculations. You might also have to sign a declaration that you are not expecting any legal stake in the property in return for your contribution.
If you don’t have a huge savings pot to dip into, you could sell your house for cash, downsize and give the surplus money to your child. Downsizing gives you the benefit of having a more affordable property with less maintenance and can free up the capital you need to help your child buy their first home.
Take Out a New Mortgage
There are several types of mortgage that could help you to support your child in their property purchase.
A guarantor mortgage allows you to borrow a sum of money based on your income and assets. You would be liable to cover the repayments on your child’s home if they fail to pay for any reason.
You could take out a joint mortgage with your child, just as they might with a partner. The loan amount will depend on you and your child’s combined income and any remaining balance on your own mortgage. You will both be named on the title deeds to the property and share responsibility for repayments. If you own a property already, you may incur the second home stamp duty surcharge.
A joint borrower sole proprietor (JBSP) mortgage is calculated in the same way as a joint mortgage, but only your child’s name appears on the deeds. They are the sole owner, but you are still both liable for the mortgage repayments. A major benefit of a JBSP mortgage is that you won’t have to pay the second home stamp duty fee because you are not a named owner of your child’s property.
Remortgaging Your Property
If you have a mortgage on your own property, you could remortgage to add to your existing loan and provide the funds you need to help your child. Your monthly repayments or the mortgage term would increase in line with the additional funds borrowed.
Things to Keep in Mind
Every parent wants to help their child progress in life and achieve their goals. But muddying the waters between finances and family can cause problems if not carefully handled. You and your child should enter into the agreement with your eyes open, fully informed about the legalities involved and each with clear expectations about the agreement.
Understand Inheritance Tax (IHT)
Many people mistakenly believe that inheritance tax only applies to deceased estates. However, if you gift your child a large chunk of money, you could lose a percentage of it to HM Revenue and Customs (HMRC). The law allows a parent to give their child up to £3,000 a year without incurring IHT. This can be backdated, so, for example, a gift of £9,000 would be permissible if you’ve not given your child any money in the last three years. Your child may also be liable to pay IHT on any money received if you die within seven years of giving the gift. If your name appears on the deeds of your child’s new home, you could be liable for certain taxes too. Read up on the law, and speak to an expert to make sure you and your child are fully informed about your legal responsibilities.
Make sure you and your child both fully understand and agree on the terms of your loan or gift. If it’s a loan, be clear about the repayment terms you expect. No matter how close you are and how positive your relationship, put the agreement in a formal document drawn up by a legal expert. This will protect you both in the event of unexpected circumstances, misunderstandings or disagreements.
Update Your Will
If you are named on the property deeds of your child’s home, make sure this is included in your will. Neglecting to do so could negatively affect any other children you may have and cause disagreements if you die without making clear what you’d like to happen to your share of the property.
Don’t overstretch yourself with a hefty remortgage deal or act as a guarantor for a property your child may struggle to afford if interest rates rise or their circumstances change. You should both seek advice from an expert before committing to any shared financial arrangement.
Upcoming generations are likely to find it increasingly difficult to get on the property ladder without help from the bank of mum and dad. Do your research, and don’t rush into any agreements that could put your existing property or retirement plans at risk. Keep the lines of communication open, and seek expert financial and legal advice to make sure your means of supporting your child is right for you both.