First-Time Homeowners: Finding a deposit
More first-time buyers than ever before are turning to their parents to give them a step up on the property ladder as it becomes increasingly harder to get a mortgage. According to data from Gov.co.uk, the average house deposit is £48,831, and up to £94,088 for those looking to purchase in London.
Land Registry data indicates that property prices in the UK have increased by 5.1% compared to last year while, according to Office of National Statistics, average weekly earnings fell by 0.4%. With these stats in mind, it is evident why first-time homeowners cannot afford to get on the property ladder without making a withdrawal from the Bank of Mum and Dad for a deposit. According to research by Legal and General, parents will lend a combined total of £6.5 billion in 2017, which means the Bank of Mum and Dad rivals the UK’s 9th largest mortgage lender.
Should Parents Help Their Children Buy a House?
A house deposit gift from parents is fast becoming the most popular option for first-time buyers, but it is important to understand how it works and what the potential benefits and drawbacks are before making a commitment. The question of whether parents should help their kids buy a house is determined by various factors, including their relationship and financial position.
Gifting Versus Loaning a House Deposit
Gifting: One of the easiest ways for parents to help their children is to gift the money needed for a house deposit. While mortgage lenders will accept gifted money, it is important for applicants to confirm that the money is not expected to be paid back by submitting a signed gift letter for mortgage. This is required as lenders need to know if anyone else is going to have a claim over the property in instances of repossession or reselling.
In addition, if the money is meant to be paid back, the cost must be considered when working out the mortgage. One of the benefits of this method is that there are no tax implications imposed on a gifted deposit, although it is worth noting that, should both parents pass away within seven years of the gifted house deposit, it may be subject to inheritance tax.
Read: How to avoid paying inheritance tax
Loaning: There is also the option for parents to lend the house deposit to their children under specific terms and conditions for paying it back. Since this is not gifted money, parents will have to produce an agreement clearly stating the terms of the loan, which should include the loan amount, the duration, the amount of interest being charged (if any) and the implications of a breach in contract. This is done by the donor and not a lawyer, as long as all the bases are covered.
Applying for a Joint Mortgage
A joint mortgage is an option if both parents and child are employed. This type of mortgage takes both parents’ as well as the child’s income into consideration, as well as whether parents have any money outstanding on their own mortgage. Both the parent and child’s name will appear on the deeds, which gives all parties involved equal power over future transactions regarding the property. A joint mortgage could make it easier for first-time homeowners to get a mortgage and also enables them to borrow a larger sum.
There are a few pitfalls for parents in this seemingly convenient option:
- Parents are just as liable as their child for the mortgage repayments
- There may be tax implications if parents already have a mortgage
- Age plays a factor as lenders will not offer mortgage terms extending a mortgage holder’s 70th birthday
- This means that both parents must be 45 years or younger to qualify for a standard 25-year mortgage
- A shorter mortgage term will drastically affect the price of the instalments
Is Remortgaging a Good Idea?
If parents are dead set on helping their children purchase a home but don’t have much cash, a remortgage could seem like a valid option. This would involve arranging a new mortgage an existing one or transferring the mortgage to a different lender. The mortgage term would therefore be extended, although repayments could rise depending on the terms of the agreement. While this is helpful for children, it is important that parents consider the long-term implications of remortgaging a home and how it could affect any retirement plans.
Guarantor Mortgages
Existing homeowners could make use of the equity in the property and act as a guarantor for a child’s deposit. A guarantor agrees to pay the mortgage should the original holder be unable to do so. The lender will assess the income and credit records of the parents to ensure affordability. The downside to this is that, should neither party be able to repay the mortgage, the initial home is at risk of being repossessed.
According to the Telegraph Financial Services, ‘a record £1.24 billion of housing wealth was unlocked via equity release schemes in the second half of last year, with total lending for the year reaching £2.15 billion’ – this makes it one of the fastest growing mortgage segments of the year.
If you’re looking to buy a home for the first time, Douglas & Gordon will guide you through the process smoothly and effortlessly from start to finish. With over 60 years’ experience in the property market, we’ll find the ideal home to suit your lifestyle. Start off on the right foot and speak to an expert today.
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Sources
https://www.legalandgeneral.com/insurance/home/bank-of-mum-and-dad/