As we covered in our report on tackling housing in the UK, this is undeniably a tough time for first time buyers. With the Bank of Mum and Dad being the most liquid lender in the country, it makes sense for us to look how helping a child buy a home can be done practically.
The shortage of new homes and an advantageous tax system for buy to let investors has helped to push house prices out of reach of most first time buyers. According to research last year, single first-time buyers now need to save for an average of 13 years to have enough for a deposit, compared with just a year’s worth of savings back in the 1990s.
Even Mark Carney, the governor of the Bank of England, has said that tackling housing is the “biggest risk” to the UK economy.
You can raise the money in various ways: From savings, profits from downsizing your own home, borrowing against your home and equity release. But before you lend or gift money towards a new home for your children, consider its impact on your future tax liabilities, your ability to fund your retirement and protecting your interests.
Gifting a deposit
The obvious approach, if it is possible for you or your parent, is give your child as much as you can afford to. As long as your child can meet the requirements of mortgage lenders, a larger the deposit will mean they can access a better mortgage rate with a lower loan to value ratio.
Lend the money
An alternative to simply giving the money outright for a deposit on a property, is to lend your child the money with a repayment schedule. You can formalise the arrangement with a ‘promissory’ note.
This way you can loan them the money, charge interest and have a charge against the home. A charge means you are repaid when the house is sold, provided there is enough left after any prior charge on the part of a mortgage lender has been satisfied.
Protect your interests
If your child buys a property in joint names with another person, you can protect your money with a declaration of trust. This fixes the shares that your child and co-owner has in the property when it is sold. Once the lender is paid off, then the deposit can belong to your child or be returned to you, rather than being split with the joint owner.
Not all parents have spare cash they can afford to give away. So, you could use your assets to benefit children in other ways.
Guarantee a mortgage
You can act as a guarantee on your child’s mortgage. There are a number of ways to do this and lenders tend to have their preferred way of doing it. Including a charge on your home, your income or remortgaging your home.
But before you consider this approach, remember that being a mortgage guarantor means you effectively take responsibility for someone else’s mortgage. You need to be clear in your mind about how you could be affected if things go wrong.
Most guarantor mortgages will require you to repay the entire amount your child is unable to pay and is going to default. So, as hard a decision this is, you need to be sure your child represents a good risk and will be able to keep up the mortgage repayments.
When it comes to lending, or giving money to family members, it’s important to consider what might happen in the future and get some good professional advice before proceeding.
If you are looking for the best deal, for you or your children, we can search for a mortgage to suit your circumstances. We work for you, not the lender.
Contact us today for an initial consultation.
Your home may be at risk if you do not keep up with the repayments for a loan or mortgage secured on your property.