All the key considerations if you're planning to help your kids step onto the property ladder.
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Bank of Mum and Dad
Soaring house prices and mortgage rates have made it harder than ever before to get onto the property ladder.
Little surprise then, that so many aspiring homeowners are turning to the Bank of Muum and Dad for help.
Research from the Institute for Fiscal Studies think tank found that almost half (45%) of homebuyers aged between 20 and 29 received either loans or cash from their parents to do so, with the average sum worth £25,000.
If you're thinking of helping your child buy a home, it's therefore to understand all the options open to you, and the implications of each.
Give the gift of a deposit
Making this kind of gift while you are still relatively young can be an excellent way to reduce an inheritance tax bill further down the line.
Every year, each parent can give away £3,000 which is considered to be out of their estate for inheritance tax purposes immediately.
You can backdate this for a year too (if you didn’t use your allowance last year) so that a couple can give away £12,000 this way.
If your children need more than this, then as long as you live for seven years after giving them any size of gift, it will be out of your estate for inheritance tax purposes.
There are five ways you can generate a lump sum to give to your child to help them buy a property of their own:
How to cut your Inheritance Tax bill
1. Put money into a Junior ISA
If your children are already at the house-buying age, this isn’t going to be enormously helpful.
However, for younger children, it’s a brilliant way to give them a head start in life. All the money you put in can grow completely tax-free, so they can build a nest egg for when they reach the age of 18.
There are Cash JISAs and investment ones. Investment JISAs will put your capital at risk, but if you are putting money away for 10 years or more, they have far more potential for growth than cash.
This year you can put up to £9,000 into a JISA, but you don’t have to max it out to make a difference.
2. Remortgage
If your offspring have already reached house-buying age, there’s only going to be a limited amount you can achieve through saving, so many parents consider remortgaging their own home in order to free up a lump sum.
If you have significant equity in your home, you can take out a new mortgage and generate a cash lump sum, by either agreeing to higher monthly repayments or stretching the mortgage over a longer period.
If you’re considering this route, it’s worth exploring how easy it would be for you to remortgage, and whether lenders consider your age to be a barrier.
If you are a bit older, you may need to use a specialist lender, and you may face a higher interest rate as a result.
You also need to consider the impact of borrowing more. If you face higher monthly payments, it may have implications for your own lifestyle: 1 in 10 parents who give money to their children feel less financially secure as a result.
You also need to be confident you can afford it because if you don’t keep up higher repayments, your home will be at risk. If you are borrowing for longer, meanwhile, you may need to reassess your retirement plans.
3. Downsize
It’s estimated that half of people who downsize use at least some of the money to help young family members onto the housing ladder.
If you are only staying in a large family house because your adult offspring can’t afford to move out, then it could be a useful solution.
However, before you downsize you need to be sure you will be happy with less space.
You should also consider whether you’re willing to move again in the future. If not, you need to reflect on your future needs, and whether it’s going to be the right property – in the right place – if your health or mobility deteriorates.
It’s important to do the maths too: smaller homes are not always much cheaper, especially in areas of high demand.
Moving home is also an expensive business: you will spend thousands of pounds in estate agency fees, legal costs, removals and possibly stamp duty, so make sure you will be able to free up enough money to make it all worthwhile.
4. Equity release
Some people will want to consider equity release, the most common form of which is a lifetime mortgage.
Here you are borrowing money against the value of your property, and the interest on the loan rolls up and must be repaid when you die or move out.
Only around 2% of people take this approach, because of the costs involved.
The interest charges can add up, and within about 10 years, your debt can double.
If you change your mind years down the line, it can be difficult and expensive to unwind a scheme.
And if you later decide to downsize, you may discover that after you have paid off the loan and the interest, you don’t have enough money left to buy a smaller property.
5. Use your pension
Once parents are over the age of 55, they can dip into their pension to free up a lump sum for any purpose.
While that might sound extreme, it's more common than you might think: a survey by OneFamily suggested that around 1.8 million parents either already have or would consider taking out equity release to help their children get onto the property ladder.
If you are considering this route, you need to bear in mind a potential tax bill.
If you use drawdown, you can take up to 25% of your pension pot as tax-free cash, but if you plan to take more than this, it will be added to your income for the year, and you’ll pay tax at the highest marginal rate.
If it pushes you into a higher tax bracket, you could pay 40% or 45% tax on some of this money.
It's not just the tax you need to think about, because taking cash from your pension is going to affect your long-term future too.
It’s worth using a pension calculator to get to grips with the impact this will have on your retirement income, whether you are confident you will still be comfortable on a reduced income, or whether you need to consider working longer and building your pension pot up again.
Some 4% of people who have helped their kids buy a property have ended up having to postpone retirement.
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Lend money to your child
Typically, it can be difficult to simply lend the deposit to your child, because lenders are reluctant to offer your offspring a mortgage, just in case you need the money back.
Even if they accept this arrangement, if your child is making regular payments to you, the mortgage company will take this into consideration when considering affordability.
It’s therefore worth looking out for specialist mortgages. Some will, for example, let a parent provide a 10% deposit as a loan.
If their offspring meets all the remortgage payments in full and in time for the first three years, their parents get the loan back in full – with interest.
Buy with your child
If you like the idea of having a property investment, you can kill two birds with one stone by buying with your children.
You can buy as tenants in common, which can reflect the exact proportions you’ll own the home in.
You will also have the freedom to leave your share of the property to anyone you want in your will. If you take this route, it’s worth asking a lawyer to draw up a deed of trust so it’s clear where you stand.
You also need to consider the practicalities and draw up an agreement for what happens in certain circumstances, such as if they want to move house, or if you need to sell up and they don’t want to move out.
It may prompt some awkward discussions, but it’s important to have something in place to stop disagreements further down the line.
There will be Stamp Duty implications if you own your own home because you will pay the 3% surcharge on second properties.
When you come to sell you will also face Capital Gains Tax on the portion of the property you own as a second property.
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Get a joint mortgage
If you don’t have a big enough lump sum to take a stake in the property, you may be able to take out a joint mortgage in order to buy with your offspring.
Bear in mind that you’ll still face the stamp duty and capital gains tax issue, and you will both be equally liable for the repayment of the mortgage, which could leave you with a financial headache if your offspring runs into difficulties.
This will be easier for younger parents because mortgage companies typically don’t like to offer mortgages to people over the age of 65 or 70.
If you are getting a 25-year mortgage, you could run into difficulties if you are beyond your mid-40s.
You may be able to get a shorter mortgage term, but this will have implications for affordability.
Consider a guarantor mortgage
You don’t have to buy together in order to help your child with a mortgage because you can act as a guarantor.
You won’t take a stake in the property - or be liable for tax - but if your child doesn’t pay the mortgage, you are guaranteeing that you will step in.
There are a few ways of doing this, so you could act as a guarantor based on your income, you could allow a charge to be taken on your property, or you could put money into a savings account with the bank as security for the loan.
You need to understand the risks you are taking by entering into this kind of mortgage and have plans in place for how you would meet the costs if you had to.
Guarantor mortgages: how they work and where to get one
A family offset mortgage could be for you
These kinds of mortgages allow other family members to put savings into an account that’s linked to the mortgage.
The savings are offset against the loan, which can be used either to reduce interest payments or shorten the length of the loan.
This offers more flexibility for parents and doesn’t leave them open to a liability if their offspring can’t pay the mortgage.
Risks and costs
There may be costs and risks involved in all of these options, so it’s important to understand just what you’re agreeing to when you offer to help your children onto the property ladder.
Of course, it’s also vital to bear in mind that this isn’t compulsory: if it’s too much for your finances to bear, there is help available elsewhere.
First-time buyers can get free money from the government with a Help to Buy ISA or a Lifetime ISA.
They can get help with securing a larger loan through the Help to Buy equity loan scheme, or they can look into shared ownership schemes, so they don’t have to find such a big deposit in the first place.
Because while any parent will want to help their offspring as much as they can, it’s not going to help anyone if they end up causing themselves financial problems in the process.
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