House prices have been rising, making it increasingly difficult for people to save up for the deposit they require to climb onto the first rung of the property ladder.
More and more first time buyers are receiving financial assistance from parents and, in some cases, their grandparents when purchasing their first home. Legal and General recently published a report listing the ‘Bank of Mum & Dad’ as being responsible for funding 25% of mortgage transactions this year.
How Can Parents Help?
Parents are helping by either using their own savings or becoming guarantors on their children’s mortgage.
Gifting or Lending Money
For those parents willing and able to, they have the option of either gifting or lending money to their children to use as a deposit. Whilst this is very helpful, we recommend that professional advice is sought with regards to both parties signing formal written agreements detailing any repayment plan and ownership rights.
Parents wishing to lend money to their children should note that lenders will not accept this arrangement in most cases as they require the deposit sum to be a gift which is not repayable, and that the parents do not wish to have any interest in the property.
Learn more on this topic in our blog post ‘The Legalities of Cash Gifts: How Much Money Can I Gift Tax Free?’
If the property is being purchased by an unmarried couple and the monies are lent by one of the parents or an unequal amount from both sets of parents, then the couple should consider signing a Declaration of Trust.
You might have seen TV adverts promoting guarantor mortgages? Essentially these are a relatively new mortgage product designed by the major lenders which allows borrowers to take on larger loans using a family member as a guarantor.
Like the majority of financial products, there are strict criteria that all parties have to comply with. If a parent’s home was to be used as collateral there will need to be at least 25% equity in the property which would be secured by the lender as a charge.
Should the children default on their payments, the parent would be liable and the lender could force the parents to remortgage to make up the shortfall. Or, in exceptional circumstances, their guarantor’s house could be repossessed.
However, if the mortgage payments are kept up to date then the guarantors would not have to pay anything.
There are a plethora of other options available for parents to help their children secure their first home including family offset mortgages which use parents’ savings locked into accounts that are linked to the child’s mortgage.
You can apply to buy a property with your child. Some lenders offer this type of joint mortgage. It can enable a larger sum to be borrowed, as both incomes can be used. However, you should be aware that if you already own a property, it would be counted as a second home, so you would have to pay an additional 3% on existing stamp duty rates.
Read more: FAQ Series: What is the Stamp Duty Threshold?
If it is your second home and you are still on the mortgage when the property is sold, there may be capital gains tax (CGT) liabilities.
Read more: The 10 Minute Guide to… Capital Gains Tax
Always Seek Financial Advice
We strongly recommend that you always seek financial advice from a professional to fully explain the products available to you. If you have any questions about the home purchasing process, please contact our friendly conveyancing solicitors in South Wales.