Chancellor Rachel Reeves’ budget included an immediate increase on stamp duty land tax surcharge for second homes.
The stamp duty land tax surcharge for second properties (or ‘Higher Rate for Additional Dwellings) has gone from 3% to 5%. A second home purchaser pays a total of 10% on homes up to £925,000, and 15% on anything over £925,00.
This can become a problem if you want to buy a home for your child – or even just want to help them buy a first home.
Buying a home for your offspring
Getting on the housing ladder has become a huge hurdle for young people. The house price inflation that has made their parents wealthy has put even a small flat out of reach for many.
Some are finding the solution is the Bank of Mum and Dad. Help with the cash for a deposit is vital for many singletons and couples who simply can’t save enough to build up a deposit by themselves.
But even with a large slice of their parents’ retirement savings, the cost of mortgage repayments can be too high for many young people – or at least too high to pass lenders affordability rules.
What if you include yourself on the mortgage?
If you have paid off your own mortgage, your income may be taken into account by the lender, meaning that the big loan might be in reach after all.
Unfortunately, it also means that Mum and Dad will be – on paper at least – buying a second home. This will mean paying the Higher Rate for Additional Dwellings tariff, and quite possibly putting the home back out of reach again.
But there are potential solutions.
Become a guarantor
Becoming a guarantor of your child’s mortgage is one answer. If you agree to act as a guarantor, your name will not be on the deeds – your child (a first-time buyer) will be the legal owner. Becoming a guarantor means you will be responsible for covering the mortgage repayments if your child cannot do so, but the upside is that a lender may be prepared to make a much larger loan than if your child has to stand alone.
But what if it is the cost of repayments, rather than the affordability rules that is preventing your child from buying?
Having your (savings) cake and eating it
You may think that you need to sign over your savings to help your children afford homes. You might not be able to afford to, especially if your own retirement is on the horizon. But there is a way to keep your savings safe and still use them to give your children the help they need.
The answer is an “offset mortgage”. This allows you to use your savings to make your child’s mortgage cheaper without giving up access to your cash.
It works by linking your savings account to your child’s mortgage. The interest on your savings offset the amount the lender charges your child in interest for their mortgage.
So, if you have £40,000 in savings, and your child has borrowed £400,000, they will only pay interest on £360,000, and save around 10% on repayments as a result. If you had £400,000 to allot to an offset mortgage, your children could have a mortgage that was essentially interest free – while your savings remain completely safe, intact and ready for you to call on.
It can make even more sense now that interest rates are well above the sub-1% level they had been at for years. As savings rates rise, more people are having to pay tax on their savings income because it exceeds the £500-a-year personal savings allowance higher-rate payers are subject to. If you don’t earn interest, you don’t have any tax to pay on it.
Could it work for you?
To see how you could help your children get on the housing ladder you need to look at the numbers involved.
The simple way to see them – and the potential savings for you and for your children - is simply to call us at Continuum.
How to swerve Labour’s stamp duty raid on second homes
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to a particular mortgage product and you should seek independent financial advice before embarking on any course of action.
The Financial Conduct Authority does not regulate taxation advice or deposit accounts.
Your home may be repossessed if you do not keep up repayments on your mortgage.
