Thinking of helping your children onto the property ladder?
Many parents do like the idea of helping their children onto the housing ladder, and with current conditions for first time buyers the bank of mum and dad is in serious demand.
If you’re considering assisting your children financially, to help you work out the best way check out our top tips below…
Using equity in your home
For parents who don’t have cash to spare but do have their own home, there are various options that allow you to unlock some of the equity locked away in the property. We advise taking independent financial advice when making such decisions. Remember to be careful about borrowing money to give to others. You are responsible for meeting any interest and repayments on that load and options such as equity release, where the interest can prove expensive in the long run.
Lending or gifting a deposit
Gifting some or all of a deposit to a child will not only give them the means to secure their first home, it can also help them secure better deals. If you are lending the money, then informal lending can be tempting but should be avoided if possible. It is a good idea to get some form of repayment plan in place. When applying for a mortgage, your child’s lender may want to know whether the money you’ve given them is as a gift or as a loan and may treat a gift more favourably.
Second charge mortgages
This is also known as a secured loan. It is not very different from a standard mortgage or further advance. The difference is that it is a separate contract between a homeowner and a mortgage lender, where the homeowner already has a mortgage contract in place. It works in the same way as a normal mortgage – there are monthly repayments due including interest. That means if you fall behind, your home is still at risk of repossession.
Should you take a further advance on your mortgage?
A further advance is a second load, essentially a top-up mortgage, secured against your property from your current lender. This allows a borrower to keep their existing mortgage deal and then borrow some more money on top of that. Some lenders will have specific rates at which this can be done, whilst others will offer you a choice of their mortgage deals.
Consider a lifetime mortgage, this is another form of equity release. This option may not be right for everyone and it should be approached with caution. This form of equity release is only available to those over 55. It allows you to release cash from your property and keep living there without having to make monthly repayments.
Should you use your pension to help your kids buy a home?
Using your pension can cause financial problems if you’re not careful. If you plan to transfer out of a defined benefit pension, you must work out whether this makes financial sense for you, which is why it’s a good idea to get professional advice. If you’re considering using money saved into a defined contribution scheme, check that it does have high exit charges.
What are the tax implications of gifting large sums of money?
You need to consider the tax implications of gifting a large sum of money to your children. There are rules in place to stop people avoiding inheritance tax by simply giving away all of their money before they die. Tax implications of gifting money are based on a combination of factors, including the amount of money in question, who the money is given to and why it is given.
Mortgages for first-time buyers
In addition to the number of government schemes, help to buy has been introduced to address the difficulties facing first-time buyers. Lenders have also been innovative in creating products aimed at helping people onto the ladder. Some of these options can be attractive if a parent is looking to use some of the equity locked up in their home to help their child – without taking it out as a property loan!
Buying a house with your child
If you don’t fancy lending or giving your children money, you can always buy with them. Buying a house as tenants in common allows the parties to hold the property in unequal shares, meaning it does not have to be a 50/50 investment. We advise signing a declaration of trust, which is a formal legal document that sets out how an asset or property is owned.
By following our top tips, you have many options for your children to help get them on to the property ladder as soon as possible!