Does your child rent or do they own a property?
We say ‘child’, but you know what we mean…
We’d guess there’s a fair percentage of you who would answer ‘rent’ to the question posed above.
And it wouldn’t be a huge surprise if you did.
After all, property prices in the UK, although they’ve largely flatlined due to uncertainty surrounding Brexit, are still pricing many of the so-called Generation Rent out of buying a home.
The average price of a home in the UK in August stood at £234,853 – meaning a first-time buyer deposit of 10% would be just over £23,000.
And with salaries still lagging behind property growth, even being able to borrow enough to purchase their first home is beyond many first-timers.
As parents, however, there are things you can do to gift your children a helpful leg-up on to the first rung of the property ladder.
How to help your children buy a house
A house deposit gift from parents is becoming an ever-more common scenario for first-time buyers.
But it isn’t simply a case of handing over a lump of cash to your offspring – you need to be aware of the tax implications surrounding gifting.
You can gift up to £3,000 a year without either you or your children being liable for inheritance tax and this can be backdated by 12 months.
So, if you didn’t gift your child anything this year, in 2020 you could hand over £12,000 as a couple – a decent sum of money in anyone’s book and around 50% of that average UK first-time buyer deposit mentioned earlier.
However, and this is unfortunately a little morbid, if you die within seven years of your gift, your child could have to pay inheritance tax.
As with anything financial, always seek independent advice before gifting.
Mortgage deposit loan from parents
If gifting isn’t an option for you to help with your child’s property deposit, you could consider loaning them money.
But be absolutely clear: A loan is something that needs to be repaid, otherwise it will be classed as a gift.
Moreover, declaring a gift when it is actually a loan is mortgage fraud, so don’t even think about it.
If you do loan your child money to top up their deposit, you should draw up an agreement that outlines when the loan will be repaid and with what, if any, interest.
Your child’s mortgage lender will also take the loan into account when deciding how much to lend as a mortgage – and this could impact your child’s borrowing potential.
A guarantor mortgage
If your child is renting, they may well have come across the term ‘guarantor’ before.
And it’s essentially the same when buying a home as it is for renting one.
The lender will assess the amount your child wishes to borrow against your income and / or assets and whether they cover the loan amount.
Essentially, a guarantor mortgage means you would liable for mortgage payments should your child miss any – and this could add an further layer of risk if you still have a mortgage on your own home, so should be considered carefully.
A joint mortgage
Some parents opt for taking on a joint mortgage with their child if they are still working.
But again, this is not without its risks.
If you own your own home, you could be liable for a 3% stamp duty surcharge as the property would be classed as a second home even though you wouldn’t be living there.
And as the property would be classed in that way, you could also be liable to pay capital gains tax on any profit when the property is sold.
You’d also be liable for the mortgage payments, too, if your child went into arrears.
Remortgaging your own home
Another option for you as a parent is to release funds from your own property by remortgaging and gifting or loaning your child a deposit.
However, if you are nearing retirement, this is almost certainly a bad idea and most lenders would view it as such – before refusing.
Even if you’re still working and not near retirement age, you should consider the additional interest you would pay by remortgaging, not to mention the fact that, should you struggle to meet repayments, your home would be at risk.
Always seek independent financial advice before even considering this option.
Tips when helping your child buy a house
- Make sure your child is fully aware of the terms of any cash assistance and whether it’s a loan or a gift
- Draw up an agreement if you loan your child money and speak to a solicitor about making it legally binding.
- Keep communicating. Tell your child to let you know if they are struggling to meet mortgage repayments, so you can help.
If your child is looking for their first home why not take a look at the wide range of properties we have for sale right now.
Want more advice? Get in touch with your local Whitegates office today and we would be happy to help.