Scraping together a deposit on a first home is one of the biggest barriers to home ownership for many young people.
A first-time buyer usually needs a deposit between 5% and 25% of the price of the property.
The average asking price of a first-time buyer home (with two bedrooms or fewer) is currently just below £225,000. This requires a minimum deposit of £12,750, while larger deposits usually mean cheaper mortgage interest rates.
Saving that kind of money can be long and frustrating business, particularly for singles and couples with rent to pay while scrimping. Some even move back into parental homes to ease their cashflow.
This phenomenon may be one of the reasons, as well as simple generosity, behind the large numbers of parents who decide to give their children the deposit they need.
At Continuum we are looking at what it means to open your own personal branch of the Bank of Mum and Dad, and why it can be more complicated than it might seem.
Can you afford to give money away?
Giving away a four-figure sum is difficult for most people, especially if retirement is coming close and a stock of wealth is a priority. It might be tempting to treat the money as a loan rather than a gift.
But this can be problematic. Lenders need to know that borrowers can afford their mortgage, and if they need to repay a family member, the affordability of the mortgage can be called into question.
So whether you are making a contribution or providing the full deposit, it must be a gift and not a loan.
You will need to provide a statement ratified by a solicitor to say that the funds provided are a gift, not a loan, that they don’t need to be repaid and that you have no share or other rights over the property.
What’s more, funds will need to have a clear paper trail to ensure money laundering requirements are adhered to. If you are raiding your savings, both the mortgage lender and the conveyancing solicitor will need to see savings account statements to ensure that the money has come from a legitimate source.
But what if you can’t, or prefer not to give away money?
You can make it a loan with a Family Assistance Mortgage
There is a way to lend a deposit, with a Family Assistance Mortgage. This lets you lend up to 20% of the purchase price of a home.
Different lenders have varying terms and conditions, but all involve the parent or family member providing the funds lodging them in a specific, linked savings account with the lender, which then forms the necessary deposit for the mortgage.
Providing the borrower keeps up their monthly payments for the term of the mortgage product, the savings are returned with what can be an attractive rate of interest at the end of a pre-determined period, often around five years.
Your homebuying offspring will have what is in effect a 100% mortgage, while you have a secure home for your spare wealth.
If you don’t have the cash?
If you don’t have cash available for a deposit, you may still be able to help your children get over the deposit hurdle. It is possible to use the equity in your home as security for the purchase of another property by a family member. A home equity loan allows you to use your home equity as collateral within a loan agreement. According to UK home equity loan regulations, you’ll generally be able to use as much as 80-85% of the equity in your home as collateral.
However, you should talk to a professional should this be something you are considering.
Getting some expert help
The mortgage market is undergoing some upheavals at the moment, and with rates changing fast and different mortgage types being offered and withdrawn almost as quickly, having a mortgage expert to call on is essential.
At Continuum we can provide independent advice, help secure a mortgage from across the entire market – and advise on the complicated business of providing your children with a deposit – as a gift or otherwise.
To discover the possibilities, call us today.
The information contained in this article is based on the opinion of Continuum and does not constitute financial/mortgage advice, you should seek independent financial advice before embarking on any course of action.
Think carefully before securing other debts against your home. Your home or property may be repossessed if you do not keep up with repayments on your mortgage.
What can you buy for the average first-time buyer house price? | Property blog (rightmove.co.uk)
https://moneynerd.co.uk/how-much-borrow-home-equity-loan/
https://www.investopedia.com/home-equity-loan-maximum-5323470
