The ‘Bank of Mum and Dad’ paid out an astonishing £5bn to young British people last year so they could buy their first home. How can you help a loved one step onto the property ladder?
Providing financial support to loved ones has always been a big part of family life, whether it be giving a little pocket money, purchasing that first car or funding student accommodation.
It has become so common for parents to help their children onto the property ladder that the ‘Bank of Mum and Dad’ is now often featured as a top 10 lender.
This is no surprise when you consider that the average house price for first-time buyers has risen to £205,170 in 2016. That is almost eight times the average full-time salary in 2016. Add to this the fact that a deposit required to buy a property, usually ranges from 10% to 25% of the property value, which may set you back by as much as £46,000 for an average first home by 2020, says housing charity Shelter, and that’s a lot to find.
To help family members get ahead, parents and grandparents can lend money informally, but a number of other options are available to ensure your own longer-term interests are protected. Here are some of these options:
Use your money to deposit or offset
Depositing money on behalf of your children can give lenders more confidence when considering mortgage applications from first-time buyers.
‘Mutually exclusive’ mortgage deals allow you to earn money on your savings while at the same time helping your child to get a mortgage. You deposit funds in a linked saving account which acts as a guarantee against the mortgage debt, enabling your child to secure a mortgage without the need for a large deposit.
Just don’t forget that this arrangement means your savings are tied up until an agreed amount has been paid off on the mortgage.
Parents or grandparents can also help reduce monthly mortgage payments paid by their children in what is known as ‘offsetting’. Money is paid into an account, allowing the interest rate to be reduced for the duration of the mortgage.
If you need the money you’ve used to offset the mortgage in the future, you can expect the rate and/or duration to go back up – but it often suits families where the child’s financial circumstances improve over time, allowing them to eventually meet the full terms of the mortgage.
Make the most of your assets
If you own your home, you could use it as security for your child’s mortgage, which sounds like a great idea until you realise that it puts your own home at risk if the mortgage payments are not maintained.
Another option may be to release equity from your home. An equity release scheme may free up as much as 50% of the valuation of your property, which is repaid to the lender with interest by your estate, once you’re gone.
While this means you can offer help during your lifetime, make sure you’re not counting on this capital to fund your world cruise in retirement!
Your financial reputation
You could also use your income and financial reputation to act as a ‘guarantor’. Your own income is added to that of the mortgage applicant so they qualify to borrow more. Alternatively, you can take out a joint mortgage with them.
Again, you would be responsible for ensuring that the mortgage repayments are kept up.
Plan ahead with your finances
If your child is looking to buy a house in the medium to long term, then investing may be an option for you.
With Click & Invest, we’re making investing as straightforward as possible by providing an actively managed online service that’s available to everyone with £10,000 or more to invest.
All investment carries risk and it is important you fully understand these risks and are willing to accept them. You may get back less than you invested. The information contained in this article does not constitute advice and the information referred to may not be the same for all, therefore we strongly recommend you seek professional guidance from your independent advisor before taking any action.