It’s a difficult time for young people to get onto the housing ladder. The age of the average first-time buyer is now around 33, largely because the costs of renting reduce the amount they can save towards an upfront deposit.
As well as offering valuable, non-monetary support like savings advice or rent-free accommodation at home, there are also many ways to help financially.
Gifting Your Children or Grandchildren Money for a Deposit
Gifting your child a deposit, or a contribution to one, is arguably the simplest and easiest way of helping them get onto the housing ladder – if you’re secure enough to do so without jeopardising your own financial situation.
As well as helping fund the minimum deposit required for a house, parental contributions can help their offspring put down a higher deposit. This can decrease monthly mortgage payments through reducing the size of the loan, and also by unlocking access to better rates.
Many mainstream lenders will accept parental gifts as contributions towards a deposit. Typically, they will ask for confirmation on paper that the money is a gift, with no obligation of repayment of money, equity or legal interest in the property.
Lending Your Children or Grandchildren Money Towards Their Deposit
Another option to help your offspring with a deposit is loaning them the money, with the understanding they will pay it back over the long term.
However, lenders still consider this a loan when calculating affordability, even if it isn’t formalised via a bank.
Since the 2014 Mortgage Market Review, lenders can turn down applicants for a mortgage if they have a loan to repay, even if that loan was expressly for the purpose of funding a deposit. And, if lenders are happy to lend to them, the obligation to pay back a loan might impact the amount they can borrow.
So, whilst a parental loan could be a workable option if your child’s major issue is an upfront deposit rather than general affordability, it’s important to tread carefully here.
As with any loan to a loved one, make sure you’re in a secure enough position to offer the money in the first place. You might also want to consider the effect on any personal relationships in the event that the loan isn’t paid back.
Specialist Mortgage Schemes
There are specialist mortgage schemes that make the housing market more accessible for your offspring. You have three main options here.
A guarantor mortgage lets parents step in to pay monthly mortgage payments if the child is ever unable to. Typically, this means that the bank is happy to lend more as risk of default is lower – but your property could be at risk too if you can’t pick up the bill.
Parents can also front their savings to reduce costs via an offset mortgage. This involves depositing a lump sum into an account linked to your child’s mortgage to reduce the amount of upfront deposit they need to pay – or remove the need for it entirely. When your offspring accumulate enough equity in the property, this sum is released back to you.
There are a range of offset mortgage options available, and all operate slightly differently – so it’s worth checking the small print and taking time to find an option that works for you. Some allow you to use interest on your savings to offset the interest due on your child’s mortgage. Others pay out interest on parent’s savings once they are released, and there are some lenders that will take a collateral charge against the parents’ property in place of a cash deposit.
The final option here is to file a joint mortgage application with your offspring. This, however, may only be an option if parents are still working. As this often involves parents taking out a second mortgage, there may also be implications tax-wise (for example having to pay a 3% stamp duty surcharge as a parents’ second property purchase). Your home could be at risk if you or your offspring can’t keep up mortgage payments.
If you are looking at a joint mortgage application, it may be useful to look at joint borrower sole proprietor mortgages. These allow family members to contribute their income and help you make mortgage payments each month without owning or having any legal stake in the property. This can be a great option for helping out offspring temporarily – but if either one of you can no longer afford payments, it will be up to the other party to make up the shortfall.
Remember: your own stability could be at risk if you commit to financial support without seeking impartial advice. At 75point3, we have years of experience in helping parents’ money work optimally for themselves and their offspring – book a free appointment now.
As a mortgage is secured against your home, it may be repossessed if you do not keep up the mortgage repayments