Bricks and money
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The ‘bank of mum and dad’ is now equivalent to the tenth biggest mortgage lender in the UK, according to research by Legal & General, while financial support from older family members features in one in four property transactions.
The average purchase involves a parental contribution of £17,500. So how can parents and grandparents help without damaging their own financial future and retirement?
DONATE THE DEPOSIT
This is the ideal way to assist, says Mark Harris, chief executive of mortgage broker SPF Private Clients. ‘The bigger the down payment, the cheaper the mortgage rate. The easiest way is to gift this to the children to put towards their deposit. But it has to be a gift, not a loan, or the lender will factor the repayments into affordability, meaning the child will get a smaller mortgage.’
REMORTGAGE YOUR PROPERTY
‘Parents with equity in their home can remortgage or take a further advance to release money to put towards the deposit,’ says Mark. Their age may be against them as mortgages usually have to be paid off before retirement, although some building societies – including major lenders such as Nationwide – are reviewing the upper age limits for lending and extending the cut-off to 80 or even 90.
KEEP IT IN THE FAMILY
With the National Counties building society’s Family Mortgage, parents can use equity in their home to assist their child without remortgaging. Instead the lender takes wider family assets into account so a child with only a five per cent deposit, for example, can benefit from a better mortgage rate than they would otherwise have done.
GOVERNMENT TOP UP
A Help-to-Buy ISA can be opened with an initial deposit of up to £1,000 – which could come from parents or grandparents. Deposits of up to £200 a month can be added, with the Government topping up these savings by 25 per cent, to a maximum of £3,000. The Help-to-Buy ISA is tax free and can be opened from the age of 16.
GIVE YOUR GUARANTEE
Lenders are no longer keen on parents acting as guarantors for children whose income is not high enough to get a mortgage, says Adrian Anderson, director of mortgage broker Anderson Harris. An alternative option could be Barclays’ Family Affordability Plan, which is a joint borrower/sole proprietor mortgage. ‘Parents aren’t party to the property deeds but are liable for the mortgage, along with the child,’ says Adrian. ‘It gets around extra stamp duty or Capital Gains Tax, which could be chargeable to the parents if the property is deemed a second home. If the child can prove they can afford the mortgage in their own right at a later date, the parents can eventually be released from their obligations.’
Barclays also has the Family Springboard mortgage, where the borrower takes out the mortgage, while family members open a Helpful Start account into which they put 10 per cent of the property price. The borrower doesn’t need a deposit. After three years the family members get their money back, plus interest.
Parents assisting children onto the property ladder is becoming common; these safeguards will protect you all
A WORD OF WARNING
Mark Harris says: ‘Parents should seek legal and possibly tax advice too. It’s important that you don’t give away money you might need later for your own retirement.’