Soaring property prices and stricter mortgage lending laws have made the process of buying a house an uphill struggle for many; and even more so for the first-time home buyer. Many young professionals and married couples (often with children of their own) are scratching their heads as to how they can convince mortgage lenders to give them a loan, especially when they still have to establish themselves in careers that provide high enough incomes to meet lending requirements. Is it any surprise that many end up moving back in with their parents?
To help their children out of this predicament – and possibly to preserve their own privacy and sanity – many parents provide much-needed financial assistance to secure a mortgage. According to The Week, 64 per cent of first time home buyers receive financial assistance from their parents, and one in ten young adults has even approached their grandparents for help.
Given the situation, there are a number of mortgages that cater specifically to parents looking to help their children purchase homes. The simplest, most effective way to help your children is to contribute funds directly to the deposit on the mortgage, but you can choose between several options, depending on your financial situation and requirements. We look at some below:
Option 1: Contribute towards the deposit
According to an article on Money.co.uk, you need to contribute about 25 per cent of the value of the property. You have a number of options if you choose to take this approach:
- You could give them the money as a gift, which would make it tax free. However, if you die within 7 years of doing so, the loan becomes part of your estate and therefore subject to inheritance tax.
- You could loan them the money under the condition that they repay it.
- You can have a 'deed of trust' drawn up, which stipulates that the funds be returned to you if the property is sold.
- If you are a retiree, you can contribute a portion of your available pension funds to the cause, thanks to new UK pension laws which allow you more freedom when it comes to using your fund.
Option 2: Mortgages
If you lack the capital to make a direct contribution, you and your child can apply for one of the following mortgages.
- Guarantor mortgage: As a guarantor, your income as well as your child's will be considered by mortgage lenders. It is assumed that you will cover any payments that your child is unable to make, so lenders are more inclined to agree to such a deal.
- Family offset mortgage: You maintain a savings account with the lender and the interest on the mortgage is offset against the interest you would normally receive on the savings. Money you put into this account will also reduce the overall debt, but it can still be withdrawn at any point. This is an effective way to make use of savings that would otherwise be generating very low cash returns.
- Joint mortgages: A joint mortgage is similar to a guarantor mortgage in that you will cover any payments your child cannot make. In addition to that, you get a share in the property.
These are just a few of the ways you can help your children get their feet on the property ladder. However, remember to get professional advice before choosing your course of action, as it could be the difference between a happy home for your kids and grandkids and financial ruin.
Disclaimer: The information and data provided are for general information purposes only. They do not constitute investment advice nor can they take account of your own particular circumstances. If you require any advice on investments, you should contact a financial or other professional adviser.