There are a number of ways parents can help their children get on the property ladder, such as guarantor or family assisted mortgages
House prices have been rising fast recently, putting the dream of home ownership outside of the reach of many young people. But parents, families and friends can help out with deposits, a guarantor mortgage or family offset mortgages.
With the average UK home costing over £180,000, anyone hoping to raise a 10% deposit will need to have at least £18,000 in savings.
In London, where the average home costs around £500,000 a typical deposit will require £50,000.
Raising this kind of money can be challenging – if not impossible – for many young first time buyers, so a little helping hand from family can be invaluable. That’s where guarantor mortgages come in.
Family assisted mortgage options
If parents, grandparents or the whole family, are unable to help by buying a house outright (which is the most direct way to help, but isn’t really on the table for most families), there are a number of ways families can help first time buyers.
With family help it’s possible for a first timer buyer to get a mortgage if they:
- Don’t meet affordability criteria
- Have a bad credit score
- Have no deposit
- Or even all of the above
Donate the deposit
This is perhaps the simplest solution, but not every family can hand £10,000+ to a first time buyer, but the money could be offered as a loan to be gradually paid back.
However, if credit status or affordability criteria are still a problem simply having a deposit won’t be enough to get a mortgage.
Use a guarantor mortgage
Even with a deposit, first-timer buyers can struggle to meet borrowing criteria: they may be self-employed or have a poor credit score, this is where a guarantor mortgage can help.
With a guarantor mortgage the guarantor (normally a parent – but can be any close friend or family member) promises to meet the mortgage repayments if the borrower fails to do so.
The guarantor will be locked-in to the agreement until the borrower has made enough repayments to reduce the mortgage to a loan to value ratio (LTV) that the lender is satisfied with, typically over 80%.
For many guarantor loans the borrower still needs a deposit, but there are guarantor mortgages up to 100% available where the guarantor offers their own property as security. But this does mean in the worst case scenario a guarantor could lose their home to cover a default.
A guarantor is effectively giving the borrower a credit score and borrowing eligibility piggyback, until they are able to financially go it alone.
Family deposit (or family offset) mortgage
A family deposit mortgage can help boost a first timer buyer’s deposit without a family member donating the money directly.
By depositing money into an account linked to the borrower’s mortgage a family member’s savings can be offset against the mortgage, making repayments more manageable. Typically though, the borrower will need at least a 5% deposit of their own.
There are instances where the borrower won’t need to put down any deposit, but this should be approached with caution.
Once a sufficient period of time has elapsed, or enough of the mortgage has been repaid, the family member will then get their money returned in full, and often with interest. The downside is that this could take many years.
Help to Buy scheme
If no-one in the family can help with a deposit, the Government’s Help to Buy scheme could help. It offers first time buyers a loan worth up to 20% of the property’s value (40% in London from April 2016), so they will only need a deposit of 5% to get a mortgage covering 75% of the property’s value.
However this scheme comes with a number of limitations on the type of house and restrictions on the value of the property, read more about this in our guide to Help to Buy.
5 top tips to help your kids onto the property ladder
If you’re a parent thinking of helping your child buy their first home, there are a few steps you should consider before rushing in and offering financial help.
Talk about everyone’s circumstances
Obviously, the first thing to think about is your own financial situation. What are your resources? How much financial help can you give?
Then think how much help your child would need – are they in a position to own a home and maintain a mortgage? Talk to them candidly about their circumstances, if they’d like to own a home, and whether they want your help to buy one.
Maintaining a property requires commitment and financial security, it could be risky if they became caught in a situation of having to keep up mortgage repayments or other maintenance costs they can’t afford.
Make your intentions clear
It will save you a lot of potential stress and confusion if you are clear from the start about what you want to do to help your child and the terms of your financial help.
You should decide whether you are giving your help as a gift, an investment, or a loan (and if you will charge interest) and make this clear to your child beforehand to avoid any confusion further down the line.
What are the tax implications?
If you are named on the property’s deeds you may have to pay tax related to the property, such as stamp duty or capital gains tax on any profit made from a sale.
If you are gifting money this may also be subject to inheritance tax if you pass away within seven years.
Depending on how you raise the money to gift, you may also have to pay capital gains tax as this could be interpreted as ‘disposing’ of assets.
Use a solicitor
Hopefully no dispute will never reach a point of having to get lawyers involved, but drafting up some formal agreements with a solicitor beforehand could be a good idea, especially if you’re treating your help with the house as a loan or investment.
On another legal note, if you want to make sure the house cannot be sold without meeting your permission you can contact the land registry to have the property restricted for sale without your consent.
Whether you have bought the entire house outright, supported with a mortgage deposit, or acted as a mortgage guarantor, you should remember this is not your home and you shouldn’t really make any rules on how your children are going to live there.
You would be well within your rights to ask them to respect your wishes with the property, but obviously using financial help as emotional leverage is likely to lead tensions within any relationship.
- First-time buyers – everything you need to know about buying your first home
- Residential mortgages – how buying a house with a mortgage works
- Home buying costs – read up on all the costs associated with buying a home