It has never been harder to get a foot on the housing ladder. House prices are now nearly eight times the average wage, and they have been rising faster than most can save.
Almost one in four first-time buyers are now turning to the ‘Bank of Mum and Dad’, figures from insurer Aldermore Bank show.
And 30-year-olds whose parents have no property wealth are 60 percent less likely to be homeowners, according to the Resolution Foundation.
But if you can’t hand over a hefty deposit to your loved ones, you could still lend a hand.
Last week we explained how you can aid them in preparing their finances to get mortgage-fit in two years. Here, we explore other ways to help them get the keys to their first home…
GIVE IT ALL AWAY
Family or friends can give all — or a chunk — of a deposit to the buyer as a simple, tax-free, non-returnable gift.
Simply handing over a deposit is the most common way parents help their children onto the ladder, and this is where the term ‘Bank of Mum and Dad’ originates.
Legal & General figures show the Bank of Mum and Dad gave close to £5.7 billion in 2018.
Alongside savings accounts for first-time buyers such as Help to Buy and Lifetime Isas, a gifted deposit can top up any shortfall.
But this may be an option only for wealthy parents who have money they won’t need in retirement if they intend to give all their loved ones an equal deposit.
Vicky Bradley, a product manager at Skipton Building Society, had saved £9,000 for a deposit when she fell in love with a £125,000 two-bed terraced house in Keighley, West Yorkshire.
Her parents, Bob and Linda Bradley, offered to help cover the 10 percent deposit and fees.
‘They agreed to an informal loan of £3,000, but then told me it was really a gift,’ says Vicky. ‘It was such a lovely surprise and allowed me to arrange a mortgage straight away.’
Gifted money could be subject to inheritance tax. For gifts above your annual allowance of £3,000, you must live longer than seven years from the date you gave the money away to avoid the risk of an inheritance tax liability on your donation.
A gifted deposit can also prompt questions over who gets the money back if a couple of splits and their house is sold.
A solicitor can draw up a legal document such as a Declaration of Trust to note which buyer the gift was given , and the share of the property to which they are entitled.
…OR GET IT BACK
If you cannot afford to give a deposit away, then you can lend it — on your own terms.
A loan lets you keep some control by specifying when you need the cash back. It may be exempt from inheritance tax but the rules are complex, so check with a tax expert first.
A solicitor is needed to draw up the terms and, just like with a mortgage, the parents would register a charge on the property deeds to ensure the loan is paid back.
The charge on the deeds would specify that on the sale of the property, or when it is remortgaged, the money lent is repaid.
A drawback for the parents, however, is that they are also required to stick to the terms and cannot readily access their cash.
Only a handful of lenders accept a parental loan as a deposit, and those that do take monthly repayments into account — which could restrict the amount your child can borrow.
LOAN YOUR NAME
First-time buyers can now add their parents to the mortgage application while keeping Mum and Dad’s names off the deeds.
A ‘joint borrower, sole proprietor’ deal allows the buyer to apply for a home loan using their parents’ income. Adding family members to the mortgage, but not the property, has grown in popularity.
Lenders prefer this over a traditional guarantor deal, where parents are vetted separately to make sure they can make payments in case the children default on the loan.
After Virgin Money withdrew its guarantor mortgage last year due to a lack of demand, only a handful of lenders, including Hinckley & Rugby, Cambridge and Market Harborough building societies, will still consider this type of deal.
Instead, around 20 lenders offer the new joint borrower arrangement — double that available ten years ago.
High Street banks such as Barclays, Metro, and Clydesdale offer a mortgage on these terms, along with building societies such as Newcastle, Hinckley & Rugby and Buckinghamshire. Interest rates are typically the same as with a regular mortgage.
The cheapest five-year fix available is 2.34 percent with Barclays for borrowers with a 10 percent deposit. On a mortgage of £150,000, the monthly repayments would be £661. Over five years, the total cost of the mortgage, including a £999 fee, would be £40,659.
The length of the mortgage offered will depend on the age of the oldest borrower.
Mark Harris, chief executive of mortgage broker SPF Private Clients, says: ‘This type of deal helps with the affordability of the mortgage but not the deposit.
It also ensures the child qualifies for first-time buyer stamp duty exemptions, while the parents sidestep the additional 3 percent stamp duty surcharge for purchasing a second home.’
And by not owning a share of the first-time buyer’s home, parents can also avoid paying capital gains tax on any increase in the value of the house when it is sold.
But Mr Harris warns: ‘Anyone named on the mortgage is jointly responsible for making payments. It could also damage their credit rating if repayments are not maintained, and affect the parents’ ability to take out further debt in the future.’
Among specialist offers aimed at families is a 100 percent mortgage tied to a savings account.
This allows first-time buyers to buy a house without a deposit on the condition that a family member deposits money in attached savings account for a fixed period.
The Barclays Family Springboard and Lloyds Lend A Hand mortgages require 10 percent of the value of the house to be locked away in a fixed-interest savings account for three years.
Although your money is tucked away and you cannot access it in an emergency, you will get it back, along with interest, when the term ends.
Lloyds pays 2.5 percent on savings, and Barclays currently pays 2.25 percent — its rate is set 1.5 percent above the Bank of England base rate.
David Hollingworth, of mortgage broker L&C, says: ‘This could help parents or grandparents who are not in a position to give money away, or have a large family and need to share their wealth around.’
But for the first-time buyer, it may mean they have to stay in the property until its value increases enough to give them a substantial deposit in order to take the next step on the housing ladder.
If the house price falls, they could find themselves in negative equity. If mortgage payments are missed, banks may hold on to the money for longer until they are cleared or, depending on the lender, use some of the money to clear any debts.
Former garage owner Carl Bojen, 65, used the Family Springboard mortgage to help his granddaughter Toni Thornton, 28, buy her first home nearby in Grimsby, Lincolnshire, with partner Kane Ramsey and their son Ronny, three.
‘I want to help all my grandchildren buy their own homes, but it would break me to give all six of them a deposit,’ Carl says.
Carl and his wife Linda, 65, put £13,200 of their savings — 10 percent of the £132,000 purchase price — into a Barclays savings account attached to the mortgage. After three years Carl and Linda will get their money back with interest, ready to help their next grandchild.
Without help, Toni, who works in telephone sales, and electrician Kane would have had to save for another three years.
Another option for families is, instead of offering cash as a deposit, parents can allow the bank to put a charge — like a mortgage — on their home for the equivalent amount.
The value of that charge could be, for example, 20 to 25 percent of the value of the first-time buyer’s house. It remains on the property for around 10 years.
It can be reviewed before then, and if there is enough equity built up in the home, it can be removed early.
Aldermore Bank and Family Building Society are two lenders that offer these types of mortgages. Family BS requires the first-time buyer to contribute 5 percent of the deposit.
It could suit parents who have lots of property wealth and do not plan to move house.
If parents want to move, particularly in the short term, there must be enough equity in their new home to still provide the same guarantee.
There is also the risk that they could lose their home if their child or grandchild’s house is repossessed and there is not enough money to repay the loan.
Families can also use a savings account to slash the interest a first-time buyer pays on their mortgage.
A family offset mortgage is similar to the savings and mortgage account option, but instead of getting interested on the money in the account, it is used to reduce the mortgage cost.
When the mortgage lender checks whether the first-time buyer can afford the mortgage, they will base the assessment on the lower monthly payments, after the parents’ savings have been taken into account.
For example, if a mortgage of £150,000 was taken out, and £50,000 savings were deposited in the account, the borrower would only pay interest on £100,000 of the mortgage.
Family Building Society and Yorkshire Building Society are among those which offer the deal.
Parents will get their money back after a fixed period. This is usually ten years, but it can be reviewed earlier — for example, when the borrower’s fixed rate comes to an end.
The drawback is that the money is locked away for a period and will not earn interest for the parents. It could also be eroded by inflation.
If the house is repossessed or sold for less than the loan amount due, savings in the offset account can also be used to foot the shortfall.
But in a low-interest rate environment, savers may prefer to forego earning a small amount of interest in favor of helping their children pay less towards their monthly mortgage payments.
Kim and Alison Wilkinson, both 60, from Surrey, used a Family Building Society offset mortgage to help their daughter Sarah, 26, buy a £260,000 three-bedroom terraced home in Portsmouth, Hampshire.
The couple had built up savings but did not need to use them in the short term. Earning next to no interest in a savings account, they decided to put the money to better use.
Secondary school teacher Sarah’s mortgage with Family BS was fixed for five years at 2.89 percent.
‘Mum and Dad wanted their money to work as hard as possible,’ says Sarah. ‘By putting it in the offset account, it effectively earned 2.89 percent.’
While she could afford the monthly repayments without her parents’ help, she says: ‘This reduced my mortgage payment from around £750 to £550, which gave me the more disposable income to furnish the house and enjoy treats such as holidays, which I may not have been able to do as a first-time buyer.’
CASH IN PROPERTY
Income-poor older homeowners with plenty of property wealth could unlock their home’s equity to help.
Equity release is available to borrowers aged 55 or over. It allows homeowners to gift their property wealth now, instead of waiting until they die and their house is sold.
In the first half of 2018, close to 20 percent of borrowers taking out equity release used the money to help the family, according to Canada Life.4
The only has to be repaid only when the homeowner dies or moves into long-term care. There are also options that allow borrowers to pay the monthly interest if they want to reduce the cost of the overall loan.
This can also reduce your inheritance tax liability, as the value of the equity release loan will be deducted from the overall estate when the inheritance tax bill is calculated.
Rates on equity release mortgages are higher than traditional mortgages. The average interest rate is 5.24 percent, compared to the average two-year fixed rate of 2.49 percent on a traditional mortgage.
Interest is also rolled up and added to the loan monthly, which can double the debt every 14 years.
Parents or grandparents should seek legal advice before entering into a family mortgage arrangement.
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