The number of first-time buyers turning to the 'Bank of Mum and Dad' for help in getting on to the property ladder has soared, according to new research.
The Social Mobility Commission has reported that parents now help to fund 34.1% of property transactions, up from up from 20% seven years ago.
And that figure is going up. The Commission predicts it'll hit nearly 40% in the next 12 years.
If you are interested in helping a child or family member onto the property ladder, here are some of the key factors you need to consider.
Can you afford it?
If you want to help your kids out financially, the first thing you need to work out is: can you afford it?
Some parents will have savings or investments they can cash in. But others will need to borrow money against their home to help their kids out.
There are several ways to do this. Some parents could remortgage to release equity in their home, while those who don’t want to switch mortgage deals could get a loan secured on their home instead.
Older borrowers might be interested in equity release schemes which allow you to borrow money against your home, with the capital and interest repaid after your death or when the property is sold.
If you decide to borrow money to help your children, it’s a good idea to get some professional financial advice first.
Helping with a mortgage deposit
According to Lloyds Bank, parents spend a collective £8 billion a year on helping their kids buy a home.
The most common way parents help out is by giving their child some, or all, of the required deposit to qualify for a mortgage.
The bank says the average loan first-time buyers received from family is almost £24,000. But it doesn’t stop there – almost one in five 'second steppers' return to the Bank of Mum and Dad to move up the ladder, typically asking for £22,000.
Parents who want to help their kids with a deposit can either gift them the money, or lend it to them.
Gifting money can have consequences for Inheritance Tax (IHT). IHT is paid if a person’s estate is worth more than £325,000 when they die (although this will rise by a further £100,000 when the Family Home Allowance is introduced next month).
The donor must live for seven years after giving the gift for the amount to be exempt of IHT. Any gifts made less than seven years before death count towards the threshold.
Obviously, no one knows when they are going to die which makes IHT planning tricky. In an ideal world, parents would give their child as much as they want or need, then survive for seven years or more.
Some gifts are exempt from IHT. For example individuals can give £3,000 away each year with no IHT implications.
Leftover annual exemption can also be carried over from one tax year to the next, but the maximum exemption is £6,000.
You can give away more if the recipient is getting married or entering a civil partnership – £5,000 if it’s your child, £2,500 if it’s a grandchild or great-grandchild, and £1,000 for anyone else.
Some parents may prefer to lend their children money, with it being paid back monthly or at some point in the future – when the property is sold, for example.
Drawing up a loan document can be fairly straightforward and should set out any interest payable and the repayment schedule. It needs to be signed by both parties.
Ideally the agreement would set out what will happen to the money if one of the parties dies, or if the parent needs the money back.
If your child is buying a property, any loan agreement would need to be disclosed to the mortgage lender to be factored into the affordability assessment.
Guarantor and joint mortgages
Parents can also help their children onto the property ladder by acting as guarantor on their mortgage.
This means their income is taken into account when agreeing a mortgage deal, potentially allowing the child to borrow more.
However, as a guarantor, the parent would have to agree to cover the child’s mortgage payments if they were unable or unwilling to do so.
Another option is for parents and children to take out a joint mortgage on a property. The difference here is that the parent would legally own a share of the property. Both parties would be jointly liable for mortgage repayments.
Some mortgage lenders offer products which allow parents to offset their savings against the child’s mortgage, meaning they qualify for a much cheaper deal.
For example Barclays offers the Family Springboard Mortgage. It allows first-time buyers to purchase a property with just a 5% deposit.
The buyer’s “helpers” deposit 10% of the purchase price in a Barclays Helpful Start account – where it stays for three years. After three years the helper gets their savings back, with interest, assuming certain conditions have been met.
The selling point is that the rate for the Family Springboard Mortgage is significantly cheaper than a mainstream mortgage that you could get with a deposit of just 5%.