Bank of Mum and Dad - how can you help?
First-time buyers are finding it harder and harder to get on the property ladder. Even though mortgage rates are low, property prices are high. The cost of living is on the rise too, making it tough to save for a big enough deposit. But there are options to help first timers get a foot on the property ladder and some of these include parents who are keen (and able) to help their children out.
Briefly, the options open to first-time buyers are:
100% mortgage – there are still a few of these available where no deposit is required but the interest rate is higher than standard;
Help to Buy mortgages – for those with a 5% deposit. A government scheme aimed partly at first-time buyers whereby the government loan a deposit amount which is interest free for five years. A Help to Buy ISA is also available, enabling first time buyers to save specifically for a deposit;
Starter Home scheme – currently in the pipeline for 2020. The plan is that 200,000 new homes will be available to first-time buyers at a minimum of 20% less than market price.
Parents get involved in the process to help ease the financial burden on their children. Property ownership and purchase is an expensive business, so those parents who are financially able and willing to help out can do so in a number of ways.
Gift a deposit
This is straightforward. Parents gift their offspring a lump sum cash amount to cover the deposit and moving costs. This could be up to 25% of the property’s price but there are many good mortgage deals around for smaller deposit amounts. Some lenders will require proof of the gift and it’s also advisable to look into tax implications.
Loan a deposit
Similar to the above but on the proviso that the money will be paid back. It may affect a mortgage decision because the borrower has another debt to repay. It will need to come with an agreement in place, outlining how and when the loan is to be repaid, at what level of interest and if the lender (parents, for example) have any claim to the property.
For those parents who want to help but don’t have the savings to provide a deposit, there are other options available, such as remortgaging, equity release or a secured loan. These carry their own costs and risks so should be very carefully considered. Other ways in which parents can help are mortgage-related.
A mortgage is taken out by the child and the parents’ assets and income are also taken into account, increasing the amount that can be borrowed. They act as guarantors on the mortgage, meaning that they are guaranteeing to make any payments that can’t be managed.
As with any joint mortgage, both names (parent and child) would be on the mortgage and deeds and both incomes are taken into consideration. As co-owner, the parent would have some rights in what happens to the property but also be liable for any debts or non-payments accrued. It would be wise to agree how much was being contributed to the monthly payment and for what shares in the property. If the parent already owns property, a joint mortgage would mean a second lot of stamp duty.
A joint borrower sole proprietor mortgage (JBSP) is a similar proposition but with only the child’s name on the deeds. The liability is the same as above, but there’s no second stamp duty to be paid and no need to use an existing property or savings as security.
Parents can choose to make a one-off payment or regular mortgage payments to reduce the overall debt. The money can be withdrawn should circumstances change, and the outstanding mortgage account will rise accordingly, as will the monthly repayments.
‘Mutually exclusive’ Mortgages
Parents’ savings are used as a guarantee and placed in an account linked to the mortgage. The savings act as a deposit and also accrue interest. However, they must remain untouched until a pre-agreed mortgage amount is paid off which can tie up savings for quite a time.
Not only are there many options to help children buy property, there are also a great deal of factors to consider. All parties need to be open and communicative about finances, agree what will happen if circumstances change, document all legal positions and liabilities and be completely honest with lenders.
Always seek legal guidance as well as independent, impartial advice from a mortgage adviser as they will know the best options currently on the market that are suited to your individual needs.
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