Mom and Dad’s bank will always have played a major role in your child’s life, but its most important role so far might be helping them buy their first home.
Buying a first time home can be difficult, with sky-high prices and stagnant wages, making homeownership beyond the reach of most younger generations.
As a result, many potential buyers are turning to the so-called Mom and Dad Bank to get a head start on the property ladder.
More than half of first-time buyers under 35 received money for a parent deposit in 2020, according to the latest figures from Legal & General.
The average donation was around £ 19,000, with one in five receiving more than £ 30,000.
So what are the different ways you can help?
Make a present
The easiest way is to donate money for a savings or investment deposit. First-time buyers need to find at least 5% of the property’s value to put on deposit or, ideally, more than that for a lower mortgage interest rate.
You can contribute as much as you want for a deposit, but any large amount could be subject to Inheritance Tax (IHT) if you die within seven years of the donation. However, you can donate up to £ 3,000 per year without IHT.
Andrew Montlake, managing director of mortgage broker Coreco, said: “Most lenders will need a letter stating that the money is a gift and that the person giving the money will have no share in the property. . ”
Also, keep in mind that a financial gift is money you won’t see again, so you need to be sure that you won’t need it yourself to prepare for retirement or for any other reason.
Offer a loan
Instead, you could offer an interest-free loan, with clear repayment terms, to help your children or grandchildren access homeownership. But you will have to take into account how much they will repay, as it could affect their chances of getting a mortgage.
“The lender will take any loan repayments into account as part of the appraisal process when deciding how much to lend,” says David Hollingworth of broker L&C. “If you’re lending money for a deposit, make sure the lender is happy to accept it as well. “
Opt for a family mortgage
Smart with money
Smart With Money is our dedicated money-making channel created to provide you with expert, easy-to-digest information to help you get the most from your money.
You can use your savings to contribute to a deposit with a special type of “family mortgage”. You hold savings in an account linked to the mortgage, so the buyer can borrow up to 100% of the value of the property. Your savings serve as a deposit and stay locked in, usually for three to five years. This money is then returned with any interest, provided the mortgage repayments have been maintained.
This is a good option if you want to offer financial assistance, but don’t want to lose access to the money you might need at a later stage. Terms and conditions vary, so it’s important to check the details carefully.
For example, Barclays offers a Family Springboard mortgage loan, lending up to 100% of the purchase price. You deposit savings of 10% in an account accessible in five years, this money constituting additional security for the lender.
Mortgage loans with surety are less and less common, but they are an option. You warrant that if the buyer does not make the refunds, you agree to cover them. Before registering, it is important to be aware of the pitfalls, as this is a major commitment.
You basically use your own savings or your assets as collateral for the mortgage. If a child misses their repayments, the lender could potentially force you to sell your house, for example, in the worst-case scenario.
Increase their borrowing power
You can apply for a joint mortgage with your young parent. Your income will also be included in the lender’s assessment, thus increasing their borrowing potential.
“Nowadays, while the mortgage is in a common name, which increases borrowing power, the property is generally in one name,” says Montlake. This way the parent is not on the title deeds and the purchase will not be subject to the stamp duty surcharge on a second home (if you are already a homeowner) nor to the overhead tax. values during the sale of the property.
How to help your kids save for their own home
If your child is currently living at home, help them with the preparatory work for the purchase. It could be rewarded when they come to buy and teach them money management skills.
Credit ratings: There may be ways to improve their credit rating. This is one of the main factors that lenders will check when they apply for a mortgage. Taking a credit card and paying off your balance each month could boost your score. They must be careful not to miss any payments by card or invoice. They can sign up to check their score for free with Experian or Clearscore, for example.
Savings accounts: Encourage them to open a Lifetime ISA and check out our guide to the different types of ISAs available to you. This is available to anyone aged 18-39, with savings increased by 25% (up to £ 1,000 per year) through a government bonus. This money can be used for a deposit (or a retirement).
Government plans: You can also consider government programs with your child that make buying a new home more affordable. Purchase assistance loans are available on new homes, for example. The government lends up to 20%, or 40% to London, of the property’s value without interest for five years. Or shared ownership regimes allow buyers to buy, say, just 25% of the property and rent the rest.