First-time buyers around the country are seeking help from the ‘bank of mum and dad’ as high property prices lock them out of home ownership. The good news for parents is that this help can come in many forms, from gifted deposits to joint and guarantor mortgages. Here, we explain the challenges facing first-time buyers in 2020 and offer advice on how you can give your child a boost on to the property ladder.
Why first-time buyers are getting older
A new report by the Mojo Mortgages has uncovered quite how much harder it is for first-time buyers today compared with 50 years ago.The online mortgage broker claims that first-time buyers in 2020 need to borrow 18 times more than those in the 1970s, and that the cost of a first home has increased from four times the average salary to eight times. These affordability issues have resulted in the average first-time buyer age rising from 25 to 33 in the past 50 years.
First-time buyers relying on ‘bank of Mum and Dad’
In such a difficult market, cash-strapped buyers are increasingly relying on help from their parents and grandparents. And one of the most common ways parents help their children is by gifting them some or all of the money for a house deposit. Research by Habito found that 40% of first-time buyers are now gifted cash by a family member, with this figure rising to 60% in London.
Should you gift your child a deposit?
Gifting a deposit might seem like a straightforward way of helping your child, but you will need to think about any tax implications. That’s because cash gifts of more than £3,000 in any one year could be subject to inheritance tax (IHT) if you die within seven years of making the gift. Even if that’s unlikely to be a concern for you, holding off gifting a deposit could prove be a costly decision. A cross-party group of MPs has proposed an overhaul the IHT system, including introducing a flat 10% tax rate on gifts of more than £30,000. If you do decide to give your child money for a deposit, you’ll need to provide a letter confirming you provided the cash and that it won’t need to be paid back. Some lenders may also require you to sign a declaration that you will have no legal interest in your child’s property. Key points: Gifting your child a deposit will allow them to take out a mortgage on the open market. With 90% and 95% mortgages dropping in cost this can be a simpler and more cost-effective option than tying yourself into a guarantor or joint mortgage – if you have the money to spare.
An alternative to gifting cash is to use your property or savings to help your child get on to the ladder with a guarantor mortgage. Guarantor mortgages are sometimes described as 100% mortgages, as many don’t require the borrower to put down a deposit. Instead, the parent will either lock up cash in a savings account with the lender or agree to have their property used as collateral if the child defaults.
Option 1: Using your savings as security These deals generally require either 5% or 10% of the cost of the new property to be placed into a savings account with the lender for a set number of years (three and five years are the most common periods). How much interest is paid on savings varies from deal to deal, and some products don’t pay any interest at all.
Option 2: Using your property as security These deals involve a lender securing a charge against the your home in case your child defaults on their mortgage. The rules vary by lender. Some will set a 10% charge against the home, while others will set a charge of as much as 25%. The charge is then released after a set number of years or once your child has paid back a big enough proportion of the mortgage. You’ll usually need to have a certain amount of equity in your property, but again this varies by lender.
The content above has been prepared for informational purpose only, and is not intended to provide, and should not be relied on for financial advice.