Should I help my children to buy a house?
Getting onto the property ladder can be difficult for first time buyers – and the bank of mum and dad has never been used more often than it is now. According to the Council of Mortgage Lenders over a third of first time buyers got help from their parents last year.
There are lots of ways you can help your children buy their first home, even if you can’t afford to buy if for them. And it’s not just parents who can help – grandparents or other family members can get involved too.
Give your child the deposit for a house
The biggest barrier to home ownership at the moment is saving a big enough deposit. So one of the easiest ways to help is to give your child a lump sum they can put down as a deposit, or add to their own savings.
The average property in the UK costs around £162,000. So for a 10% deposit you’re looking at £16,200 and for a 5% deposit – the minimum that lenders typically require – you’d need to provide £8,100.
Lenders are happy for parents to give their children a deposit, but they won’t want you to lend it to them. This is because if your child is repaying you it will limit their ability to repay the mortgage.
Pros: It doesn’t matter what your financial situation is, the lender is not interested in your finances. You have no responsibility for making mortgage repayments if anything goes wrong
Cons: It’s an expensive way to help and it could add to an inheritance tax bill if the person giving the gift dies within seven years.
Offset your savings against your child’s
Another way you can use your savings is linking them to your child’s mortgage either in an offset mortgage arrangement or as a guarantee against the loan.
Lenders such as Market Harborough Building Society and Marsden offer family offset mortgages where your savings can be offset against your child’s mortgage. This lowers the amount they need to borrow and the amount of interest they would need to pay.
Lloyds TSB and Barclays also offer mortgages where a parent or other family member deposits 20% or 10% respectively of a property’s purchase price in a savings account. Your savings are then used as a guarantee against your child defaulting on the loan.
Provided no repayments are missed Lloyds TSB will release your savings after three and a half years with 2.7% interest and Barclays after three years with 2% interest. Both lenders allow the borrower to take out a mortgage of up to 95% of a property’s value.
Pros: It doesn’t cost you anything in the long term
Cons: Whilst your savings are linked to the loan you can’t access them. In the worst case scenario you could lose your savings
Be a mortgage guarantor
Acting as a back-up for your child will make them seem less risky to lenders. A guarantor is traditionally responsible for the whole mortgage loan if a borrower defaults. But there are an increasing number of mortgages on the market where there is a cap on the amount the guarantor is responsible for.
For example Aldermore offers a family guarantee mortgage where the borrower can borrow up to 100% of a property’s value. A parent or grandparent must then guarantee the amount of mortgage above 75% loan-to-value. The portion of the loan you are guaranteeing is then secured against your home.
Pros: You don’t hand over any money upfront. If all does well it won’t cost you anything
Cons: The risk of losing your home. Being a guarantor may limit the amount of money you can borrow
Helping your child get a mortgage
Whatever you decide to do make sure you can afford it. Although you want the best for your kids make sure you don’t overstretch your own finances in the process. Your own financial stability and a comfortable retirement is just as important.