How to help your children get onto the property ladder
As parents, long-term financial security is one of the most precious things we can give to our children. Matt Stevens, Director at The Mortgage Genie, shares his expert advice for helping your kids to buy their first home.
The first step onto the property ladder is always the hardest, especially in today’s housing market. With the average deposit for a first home currently at a staggering £33,339 (Your Money), and with the cost of living rising faster than wages, saving up enough to secure an affordable mortgage is often a distant pipe dream for many young people. In fact, if recent market conditions continue, it’s estimated that as few as 47% of those born between 1981 and 2000 will be homeowners by the age of 45 (Resolution Foundation). For many of today’s young people, the only way they will ever stand a chance of getting onto the property ladder is with a bit of help from the bank of mum and dad.
If you want to secure your son or daughter’s financial future, then there are ways you can use your assets to give them a helping hand. In this post, I’ll discuss three different options for helping your children into their first home — just read on to learn more.
Use your savings to help with their deposit
For many aspiring homeowners, the biggest challenge is finding the money to pay the deposit. As a result, many parents are now using their own savings to help their children cover the cost, a process known as gifting a deposit. Gifting your savings to your children is one of the most straightforward ways to help them buy their first home, but it’s not as easy as simply sending them a cheque or making a transfer.
Different mortgage lenders will normally have their own rules about gifted deposits, so you should check these before you make any decisions. You’ll be asked to prove that the money is a gift and not a loan by sending a signed letter to your child’s conveyancer, and some lenders will also ask you to fill out a form.
As part of Anti-Money Laundering rules, you will also be asked to prove the source of the funds to the solicitor: for instance, by proving that the money came from selling an asset or investing in bonds or shares. Or, if you’ve built up your savings using contributions from your earnings, then you could provide bank statements to prove this. The important thing is to be upfront and honest and to provide as much evidence as you can.
Share the burden with a joint mortgage
If your child doesn’t have a very high income, then they may struggle to borrow a large enough sum get a decent home. One solution is to take out a joint mortgage: this way, lenders will take your overall combined income into account when deciding how much to lend, meaning your child will be able to borrow more money.
However, to be eligible for this sort of mortgage, most lenders will require that you’re still employed and don’t plan to leave the workplace any time soon. So, it may not be the best choice if you were hoping to retire in the near future. And, as you’ll both be sharing a joint mortgage account, your credit rating could be adversely affected if your child defaults on payments or get into other debts.
There’s also the issue of Stamp Duty Land Tax (SDLT) to consider. If you already own a property, your child’s house could technically be classed as a second home, so they won’t be able to claim first-time buyer’s SDLT relief. Instead, they’ll need to pay the additional 3% rate. So, while this type of mortgage may be beneficial to some families who don’t have the savings to gift a deposit, it can also be deceptively expensive: it’s worth speaking to a mortgage advisor to work out whether or not this could be the right route for you.
Take out a guarantor mortgage
If you don’t have enough saved to give your children a lump sum towards their deposit, then you can still help them to take out a guarantor mortgage. With this sort of mortgage, you’ll agree to guarantee a certain amount of the value of the home, meaning you’ll take on the financial responsibility should your child default on their payments. Because this offers lenders some extra security, it means your children will be able to borrow more money, and it could even help them to access better rates and more affordable monthly payments.
As a guarantor, you’ll need to be prepared to take on a higher degree of long-term financial responsibility. If your child’s circumstances change and they default on their mortgage payments, then you’ll be legally obliged by the terms of the agreement to cover the cost of the monthly payments on their behalf. So, you should think very carefully about whether you would be able to afford this.
Before you commit to this type of mortgage, it’s a smart idea to sit down with your child and create a long-term financial plan. For instance, you could encourage them to build up a cushion of savings instead of spending money on holidays during their first couple of years in their new home. This will mean they don’t need you to cover their payments if their circumstances change.
It’s safe to say that younger generations face huge challenges when it comes to buying their first home. So, if you want to help guarantee their future security, consider one of the options I’ve suggested here: this way, you can give your children the best chance of a comfortable life, and you’ll have peace of mind, too.