Family-assisted mortgage options
The most obvious way a family can help their children get onto the property ladder is by buying a house for them outright. However, this is rarely an option for most people. There are still many things that a family can do to ease the financial burden that comes with taking out a mortgage.
There are some things that may prevent a young first time buyer from taking out a mortgage. They may not meet the affordability criteria set by the lender, or they may have a poor credit rating. The large amount of money needed for a deposit is another barrier that may present itself.
Using guarantor mortgages
Guarantor mortgages are a great way to help a young person if they are having trouble taking out a mortgage on their own terms. Often they may have a bad credit rating or are self-employed and both of these factors mean that it will be unlikely that a lender will allow them to take out a mortgage.
Guarantor mortgages are more likely to be approved by a lender because the guarantor essentially promises to meet the repayments in the case of the official borrower being unable to. The guarantor is required to maintain this situation until the loan to value ratio has reached an agreed-upon point. Typically lenders will want the LTV to have dropped to around 80% before the guarantor is released from the agreement.
Guarantor loans normally still require a deposit, although the level required does vary. It is possible to get a guarantor mortgage without a loan but this is typically only available if the guarantor uses their own property as security. This means that if worse comes to worst, the guarantor could end up losing their home in order to settle the debt owed.
Family offset mortgages
If you can't afford to directly donate to a family member's deposit, then family offset or family deposit mortgages offer an alternative way to help out.
These mortgages work by putting money into a savings account that is tied to the mortgage of the family member in question. This money is then used against the value of the mortgage, often resulting in smaller levels of repayment each month. A 5% deposit will still typically be required on top of this.
After a set time period or a specific amount of the debt has been repaid, the money is given back in full and sometimes with interest.
Things to think about when helping your children buy a home
Many people want to help their children get onto the property ladder, which is completely understandable. However there are some things that you should consider before jumping into such a large financial commitment, a little bit of forward thinking can save a lot of drama down the line.
Establish everybody's financial situation
First and foremost, you want to work out your personal circumstances. Try and think about how much you can afford to help your children, you don't want to over commit yourself and then struggle to maintain the support later on.
Next, consider your child's financial situation. You need to establish whether or not they are in a position to be taking out a mortgage and if they'll be able to keep up with the repayments. You don't want to encourage them to get tied into a loan too early and end up damaging their credit rating because of the financial strain.
Specify exactly what level of support you will offer
You need to make sure that everybody involved is on the same page from the very start of the process. You don't want any confusion with your child about what you intend to offer them. Consider whether or not your contribution is being given as a gift or if it is a loan or investment. This may seem like an uncomfortable or unnecessary conversation to have but it will save everybody a lot of potential stress in the long run.
How much will need to be paid in tax?
Depending on what type of support you are planning on offering, your name may appear on the deed of the house. If this is the case, you will probably be included in some of the taxes that are associated with property ownership. Some of the taxes that you will have to pay will include capital gains tax or stamp duty.
You should also think about tax, even if you are gifting your child the money. If you pass away within seven years of giving the gift, it will be subject to inheritance tax. It is also important to work out how you made this money that you are gifting, depending on the circumstances, it may be subject to capital gains tax.
Find a solicitor
Nobody wants to enter into a legal battle with a family member, but with such a large commitment tying you together, disagreements are a possibility. As a result of this, it is important that you reach a formal agreement before you start with your arrangement. Getting a solicitor involved and working out some legal ground rules amicably can ensure that any future dispute can be resolved quickly and easily. Remember, you don't own the house.
Remember that you don't own the house
Whilst it may be tempting to feel like you have a degree of control over the house because you contributed to its purchase, you must remember that you are not the owner. Therefore it is important to allow your children the freedom to live in and run their home as they see fit. Using your financial contribution as leverage could breed resentment and diminish the appreciation they have for your support.