If your child is struggling to buy a home, you may be looking for ways you can help them on to the property ladder. With property prices continuing to rise, more stringent affordability criteria from lenders and big deposits required, more and more children are looking to the Bank of Mum and Dad to take this important first step on their property journey.
In this article we show you the top 5 ways you can help your child buy a home, looking at the advantages and disadvantages of each one and highlighting the tax implications and other associated costs you may face.
1) Gifting a deposit
If you have savings available, simply giving your child money towards a deposit is the most straightforward way to help them purchase a property. Not all lenders accept gifted deposits, so it is worth checking in advance if your preferred lender does. Generally, lenders prefer gifted deposits from parents, step-parents or grandparents rather than more distant relatives or friends.
As part of the process you will need to:
- Show how the money has accumulated as part of the lender's anti-money laundering checks. This could be a case of showing statements from a savings account, for example, or demonstrating how you have obtained income from another source
- Submitting a written statement that the money is a gift rather than a loan and you don't expect it to be repaid
- Acknowledge you have no rights over the property, either the equity in it or having the right to live there
Will tax be payable on a gifted deposit?
In the first instance, a gifted deposit is classed as a Potentially Exempt Transfer (PET) for inheritance tax (IHT) purposes and, as such, doesn't attract any immediate tax liability. However, if the person providing the gift dies within 7 years of the payment being made, the money will become a Chargeable Transfer, which could be subject to inheritance tax. Inheritance tax would be payable if all accumulated gifts made in the last 7 years by the deceased exceeded their inheritance tax allowance. However, the rate of inheritance tax applied is tapered and depends on the amount of time elapsed between the gift being made and the date of death. The table below shows the potential IHT rate applied should the person gifting the deposit die within 7 years of making the gift. For more information on IHT and gifts read our article "Inheritance tax (IHT) taper relief on gifts explained".
|Years since gift is made||Inheritance tax rate|
|Less than 3 years||40%|
|7 or more years||0%|
In addition to a lump-sum gift, you can gift your child £3,000 each year inheritance tax free. If that money is saved over several years to form a much larger deposit, it won't have to be declared as a gifted deposit to the lender and it would also fall outside of inheritance tax.
How can I make sure the gift is going to my child and not his or her partner?
If your child is buying a property with a partner, you can ask your solicitor to draw up a declaration of trust, also known as a deed of trust. This states the gift is solely intended for your child so, in the event of a break up, your child retains ownership of the gift. It is worth noting that, if your child subsequently marries their partner, this could invalidate the declaration of trust.
It may be a good idea to encourage your child to draw up a deed of trust with their partner in advance of moving in together. This document sets out each person’s responsibilities with regards to the property and outlines what will happen if the relationship breaks down.
2) Lending a deposit
If you don't want to sacrifice your savings, lending the money for a deposit is another option. Again, as with a gifted deposit, you will have to declare the loan to the mortgage lender, giving the same assurances that you don’t expect to have any rights over the property and that the money you are lending has been earned legitimately.
Your expectations on how and when the money will be repaid will need to be decided in advance. The two main options are:
- You are repaid the money when the property is sold: Some lenders insist this is agreed at the outset, with the parent unable to make demands for repayment before that point. This can be included in a deed of trust between you and your child, which will state the amount you have lent and how this will be repaid in the future.
- You are paid back in regular instalments: If this is the arrangement, the repayments on this loan will be included within the affordability assessment during the application process for the mortgage. If the repayments are too high, it is likely the applicant will be turned down for the mortgage. Details of the repayment schedule can be formalised in a promissory note, which is drawn up by a solicitor.
If you charge your child interest on the loan, you will have to pay income tax on that interest.
3) Guarantor mortgage
Guarantor mortgages work by someone acting as a "guarantor" for the mortgage debt, taking on responsibility for repaying the money if the homebuyer can't or won't in the future. The guarantor doesn't own the property and doesn't have any legal rights over it or any equity that builds up in it. Instead, they offer something as collateral for the debt, typically their own home or savings.
A standard guarantor mortgage works by the homebuyer purchasing a property with the guarantor simply acting as "back up" in case repayments can't be made in the future. The guarantor will retain this role until such a time as the homebuyer remortgages on to another deal and can take sole responsibility for the mortgage.
There is a clear risk in this set up: if the homeowner doesn't keep up with repayments, the guarantor will be liable and, if the problem persists and the property is repossessed, the guarantor could be liable for the shortfall if the property is sold off to repay the outstanding debt. As such, if you are considering taking on this type of mortgage with your child, you will have to show you have taken independent legal advice and are aware of the potential dangers.
A further option is a "family mortgage", which is a type of guarantor mortgage that offsets money from parents or other family members against the mortgage debt. They work by deposit money being held in an account linked to the mortgage for a set period of time - typically 3 to 5 years - during which time it is used as security for the mortgage. The idea is that, by the time you reach the end of that set period, the homebuyer will be able to take on the full mortgage debt independently.
Family mortgages are structured in a number of different ways. The two main types are:
- Products like the Barclays Springboard Family mortgage, where you earn interest on the money locked away and, if the repayments on the mortgage are paid in full and on time over the five year period, you get the full amount back. There is a risk there could be a delay in getting the money back if payments are missed. In the worst-case scenario, you could lose some or all of the money if the mortgage payments are persistently missed and/or the property ends up being repossessed.
- Products like the Post Office Family Link mortgage, where the homebuyer in effect takes out two mortgages, one to cover the property and another to repay the 10% deposit paid by the family member. The helper won't earn interest on the money, but will slowly get the money back over a five year period, with the homeowner then automatically continuing with just the main mortgage after that time. With this product, the risk to the helper extends beyond the 10% deposit, with the danger that, if the arrangement fails, they take on liability for the mortgage payments and any costs involved with repossession.
For a full guide to guarantor mortgages, read our article "What are guarantor mortgages - and are they a good idea?"
4) Joint mortgage
If you like the idea of buying a property with your child, possibly as a potential investment, you might like to consider taking out a joint mortgage. This means you both own the property and have joint responsibility for paying the mortgage.
While there are potential benefits to buying a property with your child, there are also a number of considerations before you enter into this arrangement. These include:
- Not all mortgage lenders will accept joint mortgages between a parent and a child
- Many lenders have a cap on the age applicants can be by the time the mortgage term comes to an end. For some, this can be as low as 65, which means that for an average 25-year term, you would have to take out the mortgage by the time you are 40. If you are older, you will either have to reduce the overall mortgage term, which will increase the monthly repayments, or shop around for a lender who is willing to lend to people into their 70s or 80s.
- There is a risk to both of your credit files and, indeed, financial security if the arrangement breaks down. In an extreme situation, the parent could risk their main home being repossessed.
What are the tax implications of a joint mortgage?
- If you are a homeowner already, your child will forego the discount on stamp duty that is usually afforded to first-time buyers. Normally, first-time buyers don’t have to pay stamp duty up to £300,000. What is more, you will then be subject to an additional 3% stamp duty levy as the new purchase will count as a second home.
- When you later sell the property, any profits for you as a second-home owner will be subject to capital gains tax.
- If you die, your child will automatically inherit the jointly owned property. It is worth clarifying with an estate planner whether your child will still have to pay inheritance tax if your total estate exceeds the £325,000 nil rate band for inheritance tax.
To get advice on joint mortgages - or any other mortgage option for you and your child - it's a good idea to speak to an independent mortgage adviser, who will help you navigate the various options available. We have vetted the services of online broker Habito*, which has a reputation for offering good quality advice for people in a variety of situations.
5) Joint borrower sole proprietor mortgage
An option that is something of a halfway house between a joint mortgage and a guarantor mortgage is a “joint borrower sole proprietor” (JBSP) mortgage. This works by you and your child taking out a mortgage together but, as with a guarantor mortgage, you don’t have any rights over the property or the equity in it and your name won’t be on the title deeds. Unlike a guarantor mortgage though, where you only have to step up to make payments if your child can’t, with a JBSP mortgage you commit to making joint payments from the start.
The idea behind JBSP mortgages is they facilitate people getting on the property ladder as the family member’s support means they will more easily pass affordability assessments and credit checks. The family member - usually a parent - agrees to pay a certain proportion of the monthly repayments, reducing this amount over time until the homeowner is in a position to make the full payment and can then remortgage to a standard mortgage product.
An added benefit with a JBSP mortgage is the fact the parent avoids having to pay the 3% stamp duty surcharge that is normally applied to second properties on top of the standard stamp duty rate. Indeed, if your child is a first-time buyer, he or she will be able to benefit from the stamp duty nil-rate band up to £300,000. For more information on stamp duty rules, check out our article "Everything you need to know about stamp duty".
What are the disadvantages of JBSP mortgages?
- They aren’t widely available so there isn’t a great deal of choice
- There can be serious ramifications if the arrangement breaks down as you will be liable for the mortgage debt. It could also cause irreparable damage to your relationship with your child. Communication is key, with both parties having to make clear their expectations on the responsibilities each side will have, at what point you will reduce the amount you are contributing and what will happen if either of your circumstances change.
- As with standard joint mortgages, lenders often have a cap on the age the borrower can be at the end of the mortgage term. This could impact on the length of mortgage you can take out or further limit the number of lenders’ products you can access
- The person who is going to own the property typically needs to demonstrate they are going to be in a position in the near future to be able to afford to service the mortgage independently. This is more easily done if you work in a profession that has clear salary progression, but can be more challenging if you are pursuing a different career.
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