A recent study found that around half of all children rely on their parents or other family members when they need a financial boost.
Many children are turning to ‘The Bank of Mum and Dad’ for a helping hand when considering buying their first home. So if your children approach you for help, how should you support them?
In this blog, we’ll explore the various ways parents can assist their children in getting onto the property ladder – with one or two tricks involving no cash at all.
Before handing over huge cash deposits to your children you should first consider the consequences.
Firstly, how much will you need? In today’s market, a mortgage provider may require as much as 25 per cent up-front on a high-risk property or debtor, although the best mortgages may require as little as five per cent.
Secondly, are you protecting your interests? While you may want to help your children, you should also consider how to protect your cash should it all go pear-shaped. For example, if your child is buying a house with a partner, will you be entitled to your cashback in the event that they separate?
It’s good to know that your interest can be protected by having your solicitor draw up a legal contract known as a ‘deed of trust’. Deeds of trust will stipulate how assets will be split if the property is sold in the future.
Lastly, you should consider inheritance tax. While there is no immediate payment on cash gifts given to your children, there may be inheritance tax to pay if you do not outlive your gift by a period of seven years.
Secured mortgage products
Luckily, if you do not have the huge lump sum to put towards a deposit, you can still help your children get their feet onto the first rung of the housing ladder.
Several banks, mortgage providers and building societies will be happy to lend to your children providing you assure the mortgage. That might mean paying the mortgage payments should your child default (as a guarantor), or even putting up your own home as security.
There are many products available – including offset mortgages, joint mortgages and guarantor mortgages – to help get your child onto the ladder without the necessity for large sums of capital.
Another option is the new Lend a Hand mortgage, which offers first-time buyers the chance to borrow the entire price of their new home – but with the considerable caveat that a relative has to have a lump sum worth 10 per cent that they are willing to tie up for three years.
Or alternatively, you could consider a Joint Borrower, Sole Proprietor (JBSP) mortgage which allows multiple borrowers (typically four) to contribute to the taking out and repayment of the mortgage without claiming ownership on the property.
If these mortgage options, equity release may be more appropriate. If you were planning to pass down cash to your children in your inheritance anyway, you can do so in life by taking out an equity mortgage on your own home. The cash is then repaid on your death, plus interest.
Buying a property is one of the most important financial decisions someone will make in their lifetime. And as a parent, you will want to do all you can to help. If you are planning to lend a helping hand, get in touch with the mortgage experts at Home of Mortgages for support and advice.
Your home may be repossessed if you do not keep up repayments on your mortgage.