How Can Parents Help First Time Buyers?
If you are a parent it can be worrying when looking at the property market and wondering how you can help your child onto the property ladder. With house prices seeming to increase despite differing forecasts and wages stagnating, these concerns are well founded.
The great news is you can help your child onto the property ladder in a number of ways and mortgage lenders understand that parents want to help wherever possible. This guide helps you understand what you can do as parents to help first time buyers.
How Can I Help my Child Buy a Home?
There are three main ways you can help your child buy a home:
- Helping with a deposit
- Assessing a suitable mortgage product
- Emotional support
Helping with a Deposit
Aside from affordability, saving a deposit is the most challenging area that first-time buyers face. If you are in the financial position to give your child some money towards their deposit it is worth considering. There are a couple of pitfalls you will need to consider before gifting a deposit for a mortgage.
You will need to waive any rights to the money that you gift your child. That means your child will be entitled to keep the money you are gifting as a deposit without repaying you. Lenders will require you sign a declaration saying the money is being given with no expectation of repayment.
You will also need to consider inheritance tax. If you gift your child money and <pass away within 7 years of that gift, inheritance tax will be owed if your estate is over the inheritance tax threshold.
Assessing the Right Mortgage Product
The typical mortgage for a first-time buyer is a standard repayment mortgage. This is the most suitable mortgage product in the majority of cases. There are mortgage products that can allow you as a parent to help your child such as Sole Proprietor Joint Liability mortgages and Guarantor Mortgages.
You may also want to consider Family Springboard mortgages which allow you to put the money you would ordinarily gift for a deposit into a savings account linked to the mortgage. This is especially useful if you have savings but can’t afford to gift the money for a deposit.
A Family Springboard mortgage will pay you interest on your savings and you will be able to withdraw your funds after the mortgage term (or a specified time by a lender). The risk of this product is if your child fails to keep up with mortgage repayments because a lender will use your savings to offset any losses.
You will undoubtedly remember how stressful buying your first property was. If you were fortunate enough to have supportive family and friends around you at the time you will realise how invaluable emotional support is during a very stressful time.
Your child will need whatever emotional support you can provide to relieve stress. Simply offering to help them move their belongings can be extremely helpful.
How Much Deposit is Needed for a First Home?
A typical mortgage deposit is 10%. Some lenders will allow you to borrow with a 5% deposit. The Family Springboard mortgage mentioned above is technically a 0% deposit mortgage, but at least a 10% deposit will need to be put into the savings account linked to the mortgage.
Can I Gift my Children Money to Buy a Home?
Yes, gifting a deposit is commonplace and many parents who can afford to help with a deposit either gift part or all of the deposit needed to their child.
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What if my Child is Buying a House with Someone Else?
Gifting a deposit works in the same manner regardless of how your child is buying a property. Be a little more cautious if your child is buying with someone else as you will be gifting money towards the second applicant’s equity as well.
This means if the relationship goes wrong in the future the second applicant will have benefitted from your generosity and there is no recourse for you to reclaim the money you have gifted.
Can I Release Equity from my Home to Help?
Yes, you can release equity from your property using Equity Release or by capital raising with a standard Remortgage to gift a deposit.
An Equity Release product is a serious financial commitment and you will need to speak to an Equity Release broker to find out if this is the right option for you.
There is sadly a negative stigma with Equity Release due to its poor reputation in the past when it was unregulated. However, following the introduction of the Equity Release Council guidelines, regulated lifetime mortgage products are now considered one of the most flexible and safeguarded options in the market.
With the prospect of fixed for life interest rates, no negative equity guarantees, permanent rights to reside, downsizing protections and more, regulated Equity Release products are now popular for those aged 55 or over looking to release equity. Crucially, Equity Release is an excellent option for parents with insufficient income to raise a standard mortgage. This is because how much you can borrow with Equity Release is not based on your income or financial commitments like a typical mortgage. Instead, it is based on your age and the value of your property.
However, Equity Release is typically more expensive than a standard remortgage to raise capital for gifting purposes, so all options should be explored by a whole of market mortgage broker, like Boon Brokers.
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Other Ways to Help Your Child Buy a Home
Affordability can be a big hurdle for first-time buyers and lenders have other products available to help them provide loans while mitigating risk.
Sole Proprietor Joint Liability Mortgages
This particular mortgage product is especially useful if your child can’t pass the affordability calculation on their own. You will be able to put yourself onto the mortgage as a joint applicant and have your income included within the affordability calculation.
The property deeds will be held in your child’s name as the Sole Proprietor. The disadvantage of this product is if your child can’t repay the mortgage because you will be liable for the mortgage payments.
In rare cases, a guarantor mortgage would be appropriate. These mortgages work in the same way as a guarantor loan, except of course the loan is secured against the property.
As a guarantor you will be co-signing on the mortgage agreement and agreeing to repay the mortgage if your child can’t.
Unfortunately, guarantor mortgages are rarely available in this current market, but they may be reintroduced in the future.
Speak to a Specialist
Some of the options outlined in this list will be suitable for you while others will be completely unsuitable. A mortgage broker will be able to understand your financial situation and compare the mortgage market for your child.
Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release Brokerage. Boon Brokers provide fee free mortgage advice. Contact Boon Brokers to discuss your child’s mortgage aspirations and book your consultation today.