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Point of View

How to help your children onto the property ladder

Graeme Sturt, Mortgage Planning Director & Senior Wealth Planner 


Over the last few decades, the divide between the ‘haves’ and ‘have-nots’ of home ownership has grown deeper, and wider. Indeed, it’s hard to open a newspaper without reading a feature about the woes of the first-time buyer, versus ‘smug’ baby boomers and buy-to-let landlords. It’s easy to see why they might be feeling disillusioned. The average age of a first-time buyer in the UK is now 30 years old, with an average deposit of £34,000. This increases to 32 years old, and an average deposit of £96,000 in London. *
 
Market forces continue to conspire against them. Research by Saga has shown that the older generation are less inclined to down-size thanks to the cost of moving, and the lack of suitable property to move to. And, although the Government has made tax changes to dis-incentivise property investors, low interest rates and buoyant rental yields have meant those investors are yet to feel the bite, and are carrying on regardless. House prices remain strong due to a severe shortage of housing in the UK, especially in the South East and London, and it could be many years before this imbalance is addressed.
 
The Government has tried to introduce schemes to encourage first time home buyers onto the property ladder, but it’s increasingly coming down to the ‘Bank of Mum and Dad’ to provide the necessary deposit for their children to purchase their first home, and we’re seeing this with many of our clients.  

So how can parents help first time buyers?

 

Gifting deposits

You can gift your child the deposit (or even a home if they are incredibly lucky), but be very careful of inheritance tax (IHT) rules. If you die within seven years of the gift, your child could be liable to pay the IHT bill, which is 40% of the value of the gift.

Lending money

You can lend your child money but it makes sense to do this formally. A ‘deed of trust’ can be drawn up by a solicitor when the money is given. This sets out how much you've contributed, how you will get it back, and when. If you charge interest on your loan, consider setting up a formal repayment schedule using a solicitor's ‘promissory note’.

Guarantor mortgages

You can guarantee your child’s mortgage debt, which means you will have to cover any payments that are missed, and could be liable for a full repayment if your child consistently defaults on the mortgage. Guarantor mortgages can take both yours and your child’s income into account, potentially meaning they need less deposit, and can borrow more. You can also use your home as collateral; securing a charge against your property instead of your child putting down a large deposit.

Family offset mortgages

You can put money into an account linked to your child's mortgage. This money is then deducted from the mortgage, reducing your child's repayments. There are drawbacks though - your money will be locked away until the mortgage has been paid down to between 75% and 80% of the property's value and, in the meantime, you won't receive any interest on your savings.

Family deposit mortgages

You can deposit cash with a lender, who then holds it as security rather than asking for a larger deposit. The money is held in a savings account, which earns interest for a pre-agreed term – usually three years. Provided your child maintains the mortgage payments, your money is returned to you with interest added.

It makes a lot of sense to help children get onto the property ladder. It can even help your inheritance tax planning. But it’s also a complex business, and must be done properly. We highly recommend you take professional advice from a mortgage adviser and tax planner before doing anything.  
 
Sources:
Homesandproperty.co.uk
Saga

Tax laws and HMRC interpretation of them are subject to change

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.