Helping Your Children on to the Property Ladder

With the average house price in the East of England exceeding £310,000 and lenders insisting on low Loan to Value (LTV) mortgages, it’s no surprise young people have been struggling to get onto the property ladder. When property rental costs are often the same or higher than monthly mortgage repayments, it is understandable that many children are turning to the Bank of Mum and Dad to help them to purchase their first home.

We get a lot of enquiries from parents who want to know the best way they can help their children buy property so here is a summary of options. If you would like any more in-depth advice, please don’t hesitate to get in touch.

Help with a deposit

Good news for all homebuyers not just first-time buyers- In the Spring Budget 2021 the government announced a new 95% mortgage guarantee scheme. The scheme will increase the availability of 95% loan-to-value mortgage products, enabling more home buyers to access mortgages without the need for prohibitively large deposits. The scheme applies to anyone purchasing a property up to £600,000 subject to affordability criteria.

You can help your child to raise the deposit by lending or gifting them money through a variety of means:

A bank of Mum and Dad loan

If you decide to loan money to your children, you can decide whether you want to charge them interest and what terms you will set for repayment. By setting up a formal repayment schedule and having a promissory note drawn up by a solicitor (although you can find templates online if you want to DIY) both parties will know where they stand, hopefully avoiding any disagreements. If your child will struggle to pay back your loan alongside mortgage payments at their current income you can have a ‘declaration of trust’ drawn up by a solicitor agreeing that the money will be repaid if the property is sold.

Release equity from your home

If most of your money is tied up in your property you can take out a secured loan against your property for the deposit. It is important to consider though that your home could be at risk if for some reason the loan repayments are not made.

You could also opt for an equity release scheme called a lifetime mortgage to borrow money against your own home. Effectively this enables you to give your children their inheritance early, probably when they need it most, from the equity in your home. There are a huge range of options for equity release, and we recommend speaking to a whole of market mortgage adviser to understand what’s best for you both now and in the future.

If you don’t want to borrow money

If you don’t want to take out borrowing to help your child buy their home, you can act as a guarantor on their mortgage or even take out a joint mortgage on the property with you owning a share of the home. These options could leave you liable if for some reason your child does not pay the monthly payments so need careful consideration. However, your income would be considered for the mortgage affordability so may enable your child to be a little more ambitious in their first dabble on the property market.

Which option is best for me?

As with all financial decisions, there are risks you should take into account and discuss with your child at the outset. What happens if a partner moves in? What is the likelihood your child has a change of work circumstances? Can they be trusted to manage their finances well?

Bear in mind that the worst case scenario could cause you to lose your home, others could leave you short of money if an unexpected expenditure occurred or a change of circumstances particularly in income happened. At Gemstone Mortgages we understand that you want to support your child to take that first step onto the property ladder and we will talk through the options and help you all to consider your choices to make the best decision for everyone.

Contact us today to make an appointment for a no obligation chat.