The phenomenal increase in property values over the last few decades has been well recorded. The average house price is now well beyond the means of those waiting to buy their first home, leaving thousands of young families and professionals stuck in rental limbo.
Understandably, it can be difficult for established homeowners to watch their younger relatives struggle onto the property ladder. The “Bank of Mum and Dad” has been around for a while, but the current crisis has reached such extremes that even the “Bank of Gran and Grandad” is a very real resource.
If you’re fortunate enough to have the means to help out your children or grandchildren, you might be wondering how to get started. Here’s a quick guide to some of the main ways in which you can help. Just remember that before making any decisions, you should speak to a qualified Independent Financial Advisor (IFA), a mortgage broker or an estate agent that can answer any questions you may have about mortgages, Help to Buy and first-time purchases.
Where do I start?
This depends on how far in advance you’re planning – it’s never too soon to start saving. Opening a tax-efficient savings or investments account (like an ISA) in your child’s name while they’re young is a great way of building a deposit later in life. These accounts let you pay in small, tax-exempt “gifts” each year, which gradually compound into a significant sum. Obviously, the sooner you can start this type of account the better.
What are the options for adult children?
If your children or grandchildren are already grown (and ready to buy a house), there are still a number of options for helping them secure a mortgage.
A gifted deposit is as simple as it sounds. A family member freely gives a sum of money that forms all or part of the deposit for the house-buyer. The gifter will have no stake in the property and no right to get their money back, but if you are in a position to do this then most lenders will accept this option without altering the terms of the mortgage product.
Guarantor mortgages can allow buyers to purchase a home with little or no mortgage, as long as they have a named guarantor to cover loan repayments if the homeowner cannot. Guarantors will usually either have a charge held on their own property. Alternatively, they will need to put a lump sum into an account that cannot be withdrawn until a certain amount of the loan has been repaid. This second method is sometimes known as a family deposit mortgage.
Family offset mortgages
With a family offset mortgage, parents or grandparents put savings into an account that is linked with the buyer’s mortgage. This sum is deducted off of the total mortgage, making the buyer’s repayments smaller and reducing interest charges. The benefit of this method is that the money still belongs to the family member, so after a period of time it’s free for them to use again.
Another popular option is joint ownership, where both the parent and child (or the grandparent and grandchild) are named on the mortgage and the deeds to the property. In this situation, their combined income will be used to calculate the loan offer and if one party fails to pay, the other will be liable.
What else do I need to consider?
When considering such a big financial decision as this, it’s really important to discuss all of your options and to think about how your situation might change in the future.
What if you find yourself in a position where you need the money back sooner than you thought? Have you considered what would happen if your child and their partner split up? What about if the relationship between you and your child deteriorated? It might not be pleasant to think about, especially if it doesn’t seem like a likely scenario, but protecting your money from the start is a wise move.
Do your research, understand your options and don’t be afraid to ask the professionals for advice.