When you decide the time has come to purchase your first property, one of the biggest factors in deciding which home to buy is affordability. The financial aspects of house purchase range further than you might at first expect. From deposits to surveys, to searches and stamp duty, the payments seem almost constant. Some are required up front, some you are billed for along the way and others are made in the form of regular monthly direct debits. First time buyers often have difficulties getting the money together to purchase their own home. This is why many are turning to the Bank of Mum and Dad. Here’s what you need to know about receiving help to buy your first home and/or helping your child buy a house.
Is Bank Of Mum And Dad Still Alive And Kicking?
Parents who are financially able, often want to help their children get on the property ladder. If you are a first time buyer seeking to buy your own property or a parent wanting to help your offspring, there are several solutions to the numerous financial obstacles in the way. However it is a big decision to make and financial advice should always be sought in these circumstances. Here are a few ways parents can help their children buy their first home:
- Gifting them money
- Loaning them money
- Using Equity as security
- Using savings as security
- Act as guarantor on a mortgage
- Get a mortgage in joint names
- Create a linked savings account
Let’s look at each of these in more detail…
Can I gift my Child Money to buy a Property?
If you are in the fortunate position to be able to gift your child a sum of cash to put towards their deposit on a new home, this means they will qualify for cheaper interest rates and get an all-together better deal on their mortgage. It can also mean they are entitled to borrow more too. Banks don’t generally have a problem with gifted deposits but they might ask for proof in the form of written confirmation that a gift was made. This is because of the stringent affordability rules – they need to make sure that the money isn’t a loan which would mean regular repayments. It’s also to make sure you do not have an interest in the property and would seek recompense if something happens to you.
Tax is not charged to either offspring or parents on gifted money. Not right away. However, inheritance tax could be an issue should the parents estate be worth over £325,000 and they die within seven years. Everyone is allowed to give away up to £3,000 a year without it affecting inheritance tax. This amount can be rolled over for one year. Two parents could give their child £12,000 if they hadn’t given any other cash gifts in the previous two years. If the giver was to pass away within seven years the money given would still be liable for inheritance tax. This means if their total estate, including the gift, is worth more than £325,000 then up to 40% tax would be due on the excess.
What if my child is buying a property with a partner or friend?
If your child is purchasing a property with a partner or friend and you intend to give them a cash gift to put towards it, there are ways to protect the money with a declaration of trust, or deed of trust. This means if they split up or fall out, your money is safe. A solicitor would have to draw up the declaration of trust which would document exactly who the money was gifted to. This would ensure your child maintains ownership and control of your gift. The people involved in the property transaction can also take out a deed of trust which state the responsibilities for outgoings and what is to happen to the property should their relationship breaks down. Remember, marriage would affect the deed of trust.
We also advise updating your will to document the gift that has been made.
Can I lend my child money to buy a house?
Lending money can pretty straight forward as long as everyone is aware and complies with the terms of the loan such as repayments, interest, when it is to be repaid by and so on. If you are lending your children money you should discuss what happens to the money if anyone involved dies.
Loans must be declared to the lender. They can have major implications for the mortgage you are applying for as it can seriously impact affordability as you are adding another monthly repayment to your outgoings. Some banks don’t even accept borrowed deposits the money being invested into the property is coming from an untested source. Think carefully about lending/borrowing money for a mortgage deposit.
Equity as security
It is possible to use a portion of the equity in a property as security against the loan your offspring are taking out. If this goes to plan, it shouldn’t cost you anything. However, if they start missing mortgage payments, therefore defaulting on the loan, you would be liable and your equity could be claimed as payment, putting your own home at risk.
Savings as security
Some offset mortgage deals allow parental savings to be ‘offset’ against a child’s or family member’s mortgage. They are a class of mortgage called ‘Family Offset Mortgages’. An advantage of doing this is that it will reduce the amount of interest your child pays. However, the obvious downside is that you wouldn’t be able to access your savings until the term on the mortgage is up.
Act as a Guarantor
There are such things as ‘Guarantor mortgages’ which means as a parent or close relative, you are able to act as a guarantor for the entirety of a mortgage debt. This means you are agreeing pay the mortgage if your child fails to. It is possible for the guarantor to be removed from the mortgage later on if the child proves themselves trustworthy and capable of taking on the debt themselves. Guarantor mortgages are declining in popularity but are still available if you search carefully.
Buy a property in Joint Names
If you are willing and able to take out a joint mortgage with your child, you would be able to buy a property together. This of course makes you liable for the mortgage repayments but by combining both parents and child’s income, a bigger loan might be available, though with bigger loans come bigger liabilities.
Also, if this is classed as your second home and you are still named on the mortgage when the property is sold, there may be capital gains tax to pay. However, some lenders will allow you to take out a joint mortgage without your name being added to the title deeds, allowing you to dismiss tax issues. Always take advice before making any big financial decisions.
Let’s break down the main points into pros and cons:
- Tax-free gift – As long as the parents in the transaction live for seven years after the gift was made, the money will be tax-free. It also helps parents reduce the size of an estate meaning a reduced inheritance tax bill sometime in the future.
- Bigger choice of mortgage – Bigger deposits mean more deals to choose from.
- Lower monthly repayments – By putting down a bigger deposit at home means borrowing less meaning a lower interest-rate. This in turn means lower monthly repayments.
- A foot on the property ladder – parents helping children financially could be the make or break when it comes to house purchase.
- A better home – with access to better deals and bigger deposits, children borrowing from the bank of mum and dad might be able to purchase a home in a more desirable location or one that they won’t outgrow too soon.
- Less mortgage options if lending – Loans from parents can mean it is harder to find a mortgage. Some lenders won’t accept lent deposits. This is because it means another person has an interest in the property.
- Relationship breakdowns – If you buy a home with a friend or partner and that relationship breaks down, you could your money could be lost. You must get a deed of trust to prevent this.
- Family fall outs – If parents lent to one child, this can cause friction with other children. Sometimes these fall outs can have life-long implications for family dynamics.
- Reduced savings- Giving away cash sums to your children could leave you with a lot less in the bank to provide for your future needs. Work out how much you can realistically afford to help without it impacting you too much in the years to come.