Top tips to help your child buy their first home
When it comes to our children, we want to do the best we can to set them up for a bright future. From the moment they’re born to the moment they leave the nest - we strive to help them make the best possible choices, and buying a home is no different.
Buying your first home is still a far cry from being easy. Financial obligations and restrictions in lending are proving problematic for many young adults, as they attempt and fail to get on the ladder by their own means. More parents than ever before are reaching into their own pockets to help fund this all-important purchase.
In October 2018 a report from the Institute for Fiscal Studies (IFS) showed that even the cheapest of homes are out of reach for at least 40% of young adults – with those under 35 unable to buy in their local area.
Deposit remains the biggest issue and has become increasingly harder to save for due to the rise in house prices and living costs in a difficult economy. Rental prices have also increased dramatically, making it harder for potential buyers to save.
For lots of young first-time buyers the only solution has been ‘BoMaD’ – the Bank of Mum and Dad - keeping buying a home for the first time firmly in the family. BoMaD continues to be a prime mover in the UK housing market. In May 2018 Legal & General reported it was the equivalent of a £5.7bn mortgage lender, supporting more people than ever: 27% of all buyers received help from friends or family in 2018, up from 25% in 2017 – purchasing almost 317,000 homes.
Before jumping to the rescue, this guide for parent’s runs through key things to consider before helping your child buy their first property.
Without a doubt, a cash gift is the simplest and easiest way to help your children. This can be a lifeline if they haven’t managed to save the minimum 5% needed for the majority of mortgages or to help increase the deposit to 10% or 15% opening the door to a much broader range of mortgage deals and lower monthly repayments.
There are several required steps to take after giving a generous gift – both for you and your child - to make sure your mortgage lender is satisfied with the arrangement, and to ensure there are no hold ups with the mortgage application once things get moving.
- Both the mortgage lender and solicitor may wish to see a bank statement or something to confirm where the gifted money is coming from.
- Identification of the person giving the gift and proof of address will be required. This is a standard part of anti-money laundering checks. Solicitors have to adhere to strict rules and want to know whether the gift has come from the sale of a property, investments or savings – along with evidence to back this up.
- Lenders will also expect to see a gifted deposit declaration letter. This is a written document confirming the cash is a genuine gift, and the person giving the money has no legal interest in the property purchase. Furthermore, it requires them to confirm that they won’t be asking for the money back. The document should include the amount being given, as well as the relationship between the gift-giver and receiver.
Things to bear in mind:
- Mortgage lenders prefer that a gift is from a family member, and some specify that gifts can only be given by people you’re related to.
- Some lenders will only accept gifted deposits from parents, whereas others will be happy with gifts from grandparents or siblings.
- If a friend or distant relative is giving the money, check with your mortgage broker or lender to see if this meets their criteria.
- If the gift is a loan it changes everything and could impact your child’s chance of getting a mortgage deal. Lenders may see this as a risk and will consider it a debt to be worked into affordability versus income.
Guarantor mortgages allow borrowers to take on larger loans, which would otherwise be out of reach if a close family member is happy to act as a ‘guarantor’ on the debt.
As parents (or grandparents) you can choose to offer your own home or savings, as a form of ‘collateral’ to secure your child’s mortgage and you’ll have to agree to cover the mortgage payments if the homeowner (your child) misses a payment.
For this to go ahead, you will need to own a proportion of your property – 25% is a standard minimum requirement – on which your children’s lender will put a charge.
One of the plus points is that potentially, your child could borrow up to 100% of a property's value with a guarantor mortgage, which doesn’t require any deposit to go ahead.
If your child keeps up with their repayments, there’s nothing for you to pay. However, if they default on the loan, you are liable to make up any shortfall.
Family Offset Mortgages
If you can't afford to contribute towards a deposit, a family offset mortgage might be another way to help.
Essentially, you put forward savings which go into an account linked to your child’s mortgage. Effectively, your savings then act as a deposit and the balance of the savings is deducted from the value of the mortgage, allowing your child to secure a mortgage at a lower loan-to-value rate.
This is a great way to help whilst retaining your funds for any future plans. The money is locked in for an extended period of time. Usually when the mortgage is worth 75% to 80% of the property’s value. Your child can’t access the funds, but you can should you need to, though some lenders may require a minimum amount to remain in the account.
Typically, a 5% deposit would still be required on top of this so your child will need to have saved something to put towards this.
After a certain amount of time has passed or a certain amount of the debt has been repaid, the money can be given back in full and sometimes with interest.
Another option is to take out a joint mortgage with your child. If you opt to go down this route, both parties will be named on the mortgage agreement and the deeds for the property, and both of your incomes will be assessed for mortgage purposes.
The difference is you would legally own a share of the property. What share of the monthly payments you take on would need to be agreed with your child up front.
It’s worth noting if you already own a property, you and your child will have to pay a 3% extra stamp duty because the government considers this to be a second property.
There is a variation of this arrangement which could save on costs. It’s known as a joint borrower, sole proprietor (JBSP) mortgage. In these deals, you and your child’s income are assessed for the mortgage, but you are not named on the property deeds. Find out more about joint mortgages.
There are lots of different equity release options which allow older homeowners to access their property wealth without having to move. The benefits to this become clear if you’re asset-rich but cash-poor, as it allows you to draw a regular income from your biggest asset – your home.
Some schemes offer the flexibility to make regular interest repayments, some allow you to access the money as and when you need it, and others allow you to pass on a guaranteed inheritance.
This is a way to give your children their inheritance early, by borrowing money on the understanding that it will be repaid after your death, via the sale of your home.
Typically, you can borrow up to 50% of the value of your home (depending on your age and health) and will not have to make any repayments - interest is added to the lump sum that must be repaid after your death.
There are two main types of equity release: lifetime mortgages, which allow you to borrow money against your house; and home reversion, whereby you sell a share in your house.
However, it’s important to note that this is not a straightforward option and has many pros and cons, do your homework before jumping in.
Be aware that there are risks in all of the above options. Make sure you research fully the one that’s right for you and your financial and personal circumstances.
Think about what happens if you act as a guarantor on your child's mortgage but are not able to make the mortgage payments if required? Worst case scenario, there is always a risk that you could lose your home if things go wrong.
- Think long term about whether you can really afford to help - not just today, but over the next five - 10 years
- Get professional advice from a property solicitor
- Get help from a mortgage broker
- Read the full terms and conditions before signing up to a mortgage
- Make sure your child gets the best deal available to them with your help
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