With the rise in house prices and the cost of living crisis, saving for a house deposit for first-time buyers is a difficult task. So, it’s no surprise that increasing numbers of younger buyers are turning to their family for financial support when it comes to getting on the housing ladder.
Property experts Savills estimate that from now until 2024, 470,000 first-time buyers will receive financial help from their parents or other family members.
Further analysis by Savills also states that gifts from the Bank of Mum and Dad will total £25 billion over the next three years. These gifts or loans from the Bank of Mum and Dad will support nearly half of all first-time buyers’ deposits.
Not only are parents helping their children get on the property ladder, but grandparents are too. Recent research by Aviva has found that 25% of grandparents have, or are hoping to, help their grandchildren become first-time homeowners.
With this in mind, here is what you need to know before helping your children or grandchildren get on the property ladder.
Decide whether the money is a gift or a loan
One of your first decisions when providing support to a child or grandchild is whether the money will be a gift or a loan.
Gifting the money to your child is one way that can easily help them get onto the property ladder. A gifted deposit is accepted by most mortgage lenders.
However, a gifted deposit could also be subject to Inheritance Tax (IHT). If you live longer than seven years after gifting the deposit, the gift will no longer be considered a part of your estate and no IHT will be due. However, if you die within seven years of gifting the deposit, IHT may become due.
Another concern could be what will happen to your gift if your child ends their relationship with the person they may be moving in with. To prevent the other person from claiming part of the gift, read below for the steps to take.
Instead of making a gift, providing a loan to your child may be the better option for you. You will still have some control over the money and there is the understanding that all the money will be paid back to you.
A loan could still be subject to IHT as it would be classed as part of your estate when you die. It will only become exempt from IHT if you dismiss the debt and gift the money instead.
Also, be aware that if you charge your children interest on the loan, you could be taxed on this interest as it would be a part of your income.
Providing a loan for your child instead of a gift could also make it more challenging for them to obtain a mortgage as many lenders will not accept a loaned deposit.
Steps to take if your child is buying with someone else
If your child is buying with their partner or friend, issues with your financial help can arise if their relationship breaks down.
To protect the money you have gifted to your child, a declaration of trust or a deed of trust can be drawn up by the solicitor working on the property purchase.
The declaration of trust will clearly state to who you gifted the money. In case of a breakup, the document will ensure your child retains your financial gift rather than having to split it with their partner or friend.
Additionally, a Living Together Agreement is often recommended by many experts, especially if your child is unmarried and buying with someone else. A Living Together Agreement allows everyone to discuss and record details of all financial contributions and what will happen if the relationship ends.
Your financial security
Gifting money for a deposit usually results in a large sum for your child, but can you afford it?
Consider whether you have the finances available after gifting money to live the life you want, whether you have enough savings for any unforeseen circumstances, and whether you have the finances to ensure you can afford your desired lifestyle during retirement.
Before making any gift, assess your finances first and then determine how you can afford to help. Getting advice and guidance from a financial planner can help you to do this.
Other ways you can help your child get on the housing ladder
After assessing your financial security, you may decide gifting or loaning a large sum of money is no longer an option.
However, there are alternative ways that you could still help your child get onto the property ladder:
- Equity as security – You can use a part of the equity in your home as additional security against the mortgage your child takes out. Keep in mind, you would be liable for a portion of the loan if your child defaults on the mortgage and it could place your home at risk.
- Family offset mortgages – Your savings would be used to form part of the deposit. However, you would have to leave your savings with the lender for 3-5 years. If your child didn’t keep up with repayments, you may lose some or all your savings.
- Guarantor mortgage – This is where you would act as a guarantor for 100% of the mortgage debt. With a guarantor mortgage, you are agreeing to cover the mortgage debt if you child fails to do so.
- Take out a joint mortgage with your child – You and your child take out a mortgage together. This could allow your child to borrow more but there could be tax implications for you if the house was later sold. As the property would be classed as a second property, you could be subject to Capital Gains Tax. Again, this option could also mean you’re liable for the repayments and debt if your child defaults.
Seek financial advice before being the Bank of Mum and Dad
The main barrier to your child or grandchild getting on the housing ladder will be the ability to save for a deposit. Those who have the option to turn to family members and the Bank of Mum and Dad will find it easier.
The Bank of Mum and Dad will become even more vital when the Help to Buy Scheme closes in March 2023, when more young people will be looking for a way to fund their deposits.
However, before gifting or loaning any money, seek advice from financial professionals to ensure you are doing the right thing financially for you. Please contact us to talk about your plans.
Please note: This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Think carefully before securing other debts against your home.
