Posted on October 23rd, 2012 | Categories - Mortgages
New research from HSBC and the Centre for Economics and Business Research (CEBR) has shown that one in five first time buyers needs help from their parents. In fact between 2008 and 2011, 100,000 first time buyers were helped by their parents.
Since the credit crunch the number of high loan to value mortgage deals has shrunk significantly, most lenders now require at least a 10% deposit and the best deals are reserved for borrowers with even more to put down.
So, if your children are caught in the ‘Catch 22’ of rising rental costs, meaning they can’t afford to save to get onto the housing ladder, what options do you have to help them?
Gifting a deposit
With house prices falling by around 20% since the credit crunch and interest rates at all-time lows, the problem facing most first time buyers is not one of affordability, but saving a large enough deposit. A recent survey by the Yorkshire Building Society found that the average first time buyer would have to save for eight years to build up a large enough deposit.
Gifting a deposit is one option for some parents. Clearly parents should think about where this money is coming from, whether they can afford to take such a large lump sum from their savings or investments, and how this might impact on future retirement plans.
Although most people make a gift never expecting it to be returned, parents should think about what might happen in the future. For example, if their child were to split up from their partner, would their deposit end up as part of a divorce settlement and ultimately
If you are uncomfortable with losing your gift you could consider taking a second charge on the property, or making the gift an interest free loan, which would have to be repaid on the sale of the house; the HSBC survey showed that around a fifth of parents, ask for part ownership of the property.
Lending a deposit
Not everyone can afford to give away thousands of pounds, indeed the HSBC survey found that 52% of parents, who help their children out, expect the money to be returned at some point in the future. Furthermore 73% of parents who made a loan to their children wanted interest on the amount lent.
The average interest rate paid by children on the loans was between 2.1% and 2.5% per year; significantly below the rate of interest which could be expected in an instant access deposit account.
Whether or not you charge your child interest, making a loan rather than a gift, should mean that parents one day receive their capital back. Although, if no interest is paid, then the buying power of the money returned will have been eroded by inflation.
Act as a guarantor
Whilst acting as a guarantor will still mean that your child needs to put down a deposit to secure the mortgage this can be a useful way of helping your child get onto the housing ladder whilst their income is relatively low, but expected to rise sharply in the future.
Lenders are not looking for parents to guarantor a mortgage indefinitely, only until their child can afford the mortgage on their own.
An alternative to the guarantor route is for the parent to take out a joint mortgage with their child.
This option may mean more lenders are available, as only a handful offer guarantor mortgages. However, it is not without complication, especially from a Capital Gains Tax (CGT) perspective if the parent already owns their own home.
Although at least one, the Woolwich, will allow the parent to be named on the mortgage but not on the house deed, helping to avoid possible CGT issues.
With both the guarantor and joint mortgage route, parents need to remember that they liable for the mortgage payments if their son or daughter defaults.
Become a mortgage lender!
The more adventurous parent could turn themselves into a mortgage lender and lend the full amount of the purchase price to their child in return for monthly interest, and ultimately the return of their capital.
This could be done by using existing savings or investments, or indeed by the parent taking out a mortgage on their own home and using it to buy the new property.
This isn’t without risks and certainly isn’t for the feint hearted. The property market has seen significant falls in value over the past few years and many people expect further drops before prices start to rise again.
Furthermore if your son or daughter fails to keep up repayments, are you really going to evict them like a mortgage lender would?
Family Offset mortgages
Some mortgage lenders have come up with innovative solutions to the problem of how parents can help their children. The family offset mortgage, is one such solution.
Using this type of arrangement the parents deposit money with the lender, which then acts as a deposit for your child’s mortgage. The money can revert back to the parent in the future when certain conditions are met, but no interest is earned on it whilst it is offsetting the mortgage.
The main advantage of this type of arrangement is that the money is still held in the parent’s name, meaning that it can never end up with an ex-partner of your son or daughter. The downside is of course that no interest is paid on the savings, which will need to be tied up for a number of years, without the possibility of access.
It’s only natural for parents to want to help their children get onto the housing ladder; most parents would hate the thought of their son or daughter paying rent to a faceless landlord.
However, before the natural inclination to help kicks in, this has to be thought through carefully. Any help offered by parents will mean some assets, or at least risk, in the case of a guarantor, being transferred from parent to child. You must be comfortable with the risk, that you may not see your savings again, or the return you get will be less than you might from an alternative investment.
It’s also important that all the possible outcomes are thought through, for example what happens to your investment if your son or daughter unfortunately split from their other half?
If you would like advice on the options you have to help your son or daughter get onto the housing ladder, our Mortgage Adviser, Linda Wood , is here to help.
Your property may be repossessed if you do not keep up repayments on your mortgage.
For providing mortgage advice we will charge an application fee of £300 and we may also be paid a fee from the lender, any fee paid by the lender will be disclosed to you. Alternatively we will charge an arrangement fee of 0.5% of the loan and refund to you any payment received by us from the lender.