In association with The Mortgage Genie
It’s no secret that becoming a first-time home-owner is getting harder and harder for young people, and many are staying in their family pad later, as getting a mortgage just doesn’t seem to be an option. Here, Matt Stevens, Director at the The Mortgage Genie, offers advice for parents who are looking to help their children get a foot on the property ladder…
There’s no denying that it’s becoming harder and harder for prospective home buyers to get their first foot on the property ladder. The average UK house price rose to a record high in the first three months of this year, according to Halifax’s House Price Index. And, when you consider the fact that the cost of living in the UK is rising far quicker than our wages are, saving for a house deposit and being able to afford the necessary mortgage repayments can feel like an impossible task for the younger generations. It’s easy to see why recent research from the Social Mobility Commission found that the proportion of first-time buyers relying on help from ‘the bank of mum and dad’ has reached a historic high.
If your children are struggling to get their first foot on the property ladder and you would like to help them out, there are a number of options you have. Here, I’m going to explain what they are, so you can choose the route that’s best for you. Read on to find out more…
Help to supplement their deposit
The easiest way to help your child get a foot up on the property ladder is by giving them a lump sum of money as a gift. If you have some savings that you don’t yet have any concrete plans for, this could be a great option for you. However, it’s worth noting that this won’t be as simple as transferring these funds into your child’s bank account so they can declare the money theirs — there is a process that will need to be followed.
If you decide to contribute to your child’s housing deposit, this will be called a gifted deposit, and the crucial thing is that it must be a gift, with no expectation of them paying you back. Lenders will typically have their own rules when it comes to gifted deposits, but you will usually be required to sign a form stating that the money is a gift rather than a loan. You might also be asked if you expect to have any equity in the property and whether you plan to live there. Conveyancers will often conduct their own checks to confirm where the money has come from, so there’s a chance you will have to present them with your bank statements.
Act as a guarantor
If you aren’t in a position to give your child a lump sum of money towards their deposit, there are other ways you can help them. One of these is to become a guarantor, which could increase the amount of money they’re able to borrow.
However, it’s important that you consider this option very carefully, as you’ll be required to guarantee your child’s mortgage repayments. As a result, if they fail to make them, you will have to foot the bill, so you need to think carefully about how comfortable you would be with this arrangement, and whether you would be happy and able to cover the repayments if necessary.
Take out a joint mortgage
Another option you have is to buy into a property with your child by taking out a joint mortgage. This will usually allow your child to buy a more expensive house as, when the affordability of a property is calculated, your earnings will also be taken into account.
There are, however, some situations in which this wouldn’t be the best option. For example, this is usually only a viable option if you’re still working and, under Mortgage Market Review rules, lenders may decline to give you a mortgage if you’re over a certain age.
There’s a chance you might run into problems if you’re still paying your own mortgage off, because you’ll be required to take out a second loan. Plus, a new property may be considered a second home, which means you might be liable to pay capital gains tax on the profits if the house is sold, and you could also have to pay 3% stamp duty on a second property. Additionally, it’s worth noting that, when you take out a joint mortgage with your child, your credit record will be tied to theirs. So, if they make any mistakes with their personal finances, you could be affected.
More and more parents are looking for ways to help their children get onto the property ladder, and these are three of the most popular ways of going about it. They all have their pros and cons, which means it’s incredibly important that you consider them all carefully against your personal circumstances.