As a parent, it can be worrying to look at the current property market and wonder how to help your child onto the property ladder. With house prices seemingly increasing despite differing forecasts and wages stagnating, these concerns are well-founded. However, the good news is that there are several ways to help your child buy their first home.
The first and most significant hurdle that first-time buyers face is saving for a deposit. If you’re in the financial position to give your child some money towards their deposit, it’s worth considering. However, there are a few pitfalls you need to consider before gifting a deposit for a mortgage. For instance, you’ll need to waive any rights to the money you gift your child, which means your child will be entitled to keep the money without repaying you. Lenders will require you to sign a declaration stating that the money is being given with no expectation of repayment. Additionally, you’ll need to consider inheritance tax. If you gift your child money and pass away within seven years of that gift, inheritance tax will be owed if your estate is over the inheritance tax threshold.
When assessing the right mortgage product, it’s essential to consider a variety of options. While a standard repayment mortgage is the most suitable mortgage product for the majority of cases, there are other products that can help you as a parent to support your child. These include Sole Proprietor Joint Liability mortgages, Guarantor Mortgages, and Family Springboard mortgages, which allow you to put the money you would ordinarily gift for a deposit into a savings account linked to the mortgage. This is especially useful if you have savings but can’t afford to gift the money for a deposit. A Family Springboard mortgage will pay you interest on your savings, and you’ll be able to withdraw your funds after the mortgage term (or a specified time by a lender). The risk of this product is if your child fails to keep up with mortgage repayments because a lender will use your savings to offset any losses.
It’s also essential to provide emotional support to your child during this stressful time. Simply offering to help them move their belongings can be extremely helpful.
The amount of deposit needed for a first home is typically 10%, although some lenders will allow you to borrow with a 5% deposit. The Family Springboard mortgage mentioned above is technically a 0% deposit mortgage, but at least a 10% deposit will need to be put into the savings account linked to the mortgage.
If your child is buying a house with someone else, gifting a deposit works in the same manner. However, you should be a little more cautious as you will be gifting money towards the second applicant’s equity as well. This means that if the relationship goes wrong in the future, the second applicant will have benefitted from your generosity, and there is no recourse for you to reclaim the money you have gifted.
Finally, you can release equity from your property using Equity Release or by capital raising with a standard Remortgage to gift a deposit. An Equity Release product is a serious financial commitment, and you will need to speak to an Equity Release broker to find out if this is the right option for you. Regulated lifetime mortgage products are now considered one of the most flexible and safeguarded options in the market, with the prospect of fixed for life interest rates, no negative equity guarantees, permanent rights to reside, downsizing protections and more. Crucially, Equity Release is an excellent option for parents with insufficient income to raise a standard mortgage.
In conclusion, there are several ways for parents to help their children get onto the property ladder, including gifting a deposit, choosing the right mortgage product, providing emotional support, and releasing equity from your property. While it’s important to consider all options and speak to a qualified mortgage broker to determine