With research showing that UK Millennials now need 13 times their annual salary to buy a home in the nation’s capital, increasing numbers of first-time buyers are being forced to turn to the Bank of Mum and Dad for financial help.
But how does one help their children onto the property ladder? And are there any risks involved in doing so?
In this article, we discuss some of the popular methods parents use to help fund first-time buyer deposits.
One of the most popular ways parents financially help their children is by simply gifting the money needed for a deposit. In the current mortgage market, this is likely to be at least 5% of the property’s value; however, the bigger deposit you place, the better. The reason being is the lower the loan-to-value ratio, the less risk there is to a lender & consequently they will offer more favourable terms.
But beware: if you are gifting a deposit, you may be asked by the lender to provide a letter confirming that the funds are a gift and not, in fact, a loan. This is what’s legally known as a ‘gifted deposit letter.’ It’s really important that this is filled out and given to the lender and conveyancing solicitor to avoid any delays or the mortgage offer being retracted.
Protecting your gift
If your child plans to buy with a partner, it’s worth considering what will happen to the gifted money should they split up.
One of the best ways to protect this chunk of money is to get a ‘Deed of Trust’ drawn up by a solicitor. This will outline who owns what should the house be divided up.
While the amount gifted for a house deposit can be as much, or as little, as you choose, there is a potential financial implication when it comes to tax. If you or your partner dies within seven years of handing over the money, your child may have to pay inheritance tax on the gifted deposit.
You can read more about gifts and inheritance tax by visiting the gov.uk website.
Naturally, if you don’t have a lot of money saved, it can be difficult to gift a substantial deposit to your children. That’s why more and more people are using their property to unlock the wealth they already have.
Equity release is a means of accessing the money tied up in your property. In short, if you’re over the age of 55, a lifetime mortgage – the most popular type of equity release plan - allows you to release equity in the form of a capital lump sum or a series of drawdowns, which can be taken as and when they are needed.
A lifetime mortgage can be secured against your main residence, second home/holiday home or buy to let property. This is a mortgage designed to run for the lifetime of the homeowner, in which the property remains 100 per cent in your name.
Advantages of using a lifetime mortgage as a way to provide your children with a house deposit are that you don’t have to pass any affordability checks (as you would have to with a traditional mortgage) and the money you release is tax-free.
The main drawback to lifetime mortgages is that the interest accruing on the amount borrowed is rolled up over time and is repaid when your plan ends – that is when you die or move into long-term care. This dissuades many parents from using equity release to fund their children’s property deposit, as it means future inheritance is reduced.
However, there is a way to stop the interest accruing, and that is to repay it monthly. Interest-only lifetime mortgages allow you to do this and it’s becoming increasingly popular for children to repay the interest on their parent’s lifetime mortgages.
This is a ‘win-win’ for both, as the child gets the much-needed deposit and parents are able to maximise the inheritance they leave – as only the initial amount borrowed will have to be repaid when the plan ends.
However, equity release isn’t for everyone, and here at Equity Release Supermarket we certainly wouldn’t advise considering a plan without first consulting with an experienced adviser. If you would like to discuss the pros and cons of equity release schemes, please contact the Equity Release Supermarket team on Freephone 0800 802 1051 or email firstname.lastname@example.org.
In some instances, parents may prefer to lend their children money with a view to being paid back at a later date. If you are planning to do this, we highly recommend drawing up a loan document. This will prevent any confusion or distress if circumstances change. For instance, problems could arise if there is no clarification as to what should happen to the money if one of the parties dies, or your child and partner split up, or if you need your money back.
This document doesn’t have to be complicated; it just needs to contain details about the basis on which the loan has been made and what will happen to the money in the event of a change in circumstances. It will also need to be signed by all parties. We would suggest in such circumstances legal advice should be obtained.
Retirement mortgages are available to older people looking to continue their existing mortgage into retirement and they could be a way to raise money to fund a first-time buyer deposit for a child.
However, to be eligible, you must pass the lender’s credit and affordability checks. This can be difficult if you have a limited income or cannot prove your income in retirement. Additionally, lenders will consider affordability of any survivor, should one party to the mortgage die early.
You will also have to make monthly repayments – either interest-only or capital and interest - and as with any other residential mortgage, your home could be repossessed if repayments are not made.
With many lenders allowing up to 4 people to apply for a mortgage, you may want to consider including your name on a joint mortgage application. The joint mortgage will then be based on both you and your child’s income, as well as any money outstanding on your own mortgage.
While this is a popular option for those who want to make borrowing enough money more feasible (while reducing the deposit needed), it will mean that your name is on the deeds, which, in turn, makes you liable for keeping up the mortgage repayments.
You may also find that this option isn’t viable if you are close to or in retirement and cannot pass the lender’s ‘affordability’ criteria.
It’s also worth noting that this can have tax implications if you already own your own home, as the new property will be viewed as a second home. This means having to pay capital gains tax on any profit when the property is sold.
Are you looking for ways to raise money for your children? Call one of our experienced advisers today on Freephone 0800 802 1051 to find out more about unlocking the wealth you have tied up in your property.