As parents, we always want to use our experience, knowledge and resources to help our children to succeed in life – and that doesn’t change whether they’re 5 or 25. A lot of the time, it’s easy to provide help that makes a difference, whether it’s in teaching life lessons, helping with a tricky bit of maths homework or simply providing support with practical tasks they don’t yet have the skills or knowledge to take on themselves. But when it comes to providing them with security as they move into adulthood, it can become more difficult. One of the bigger challenges Millennials face is in buying their own home and getting on to the housing ladder.
According to the Government’s House Price Index for June – the most recent data available – the average price of a house in the UK has dropped steadily over the last three years, more so in London than elsewhere, as political and economic uncertainty had a stagnating effect on the market.
That decline has been more pronounced in London than in the rest of the country, yet even buying in the cheapest London borough of Barking & Dagenham will set you back an average of £297,000.
How much you might be able to borrow has become more complicated and it’s no longer as simple as how many times your salary any given lender will consider agreeing.
But assuming they might get a 100% mortgage requiring no deposit (Halifax has become the latest lender to announce a return to 100% mortgages) and pass the affordability checks that are now part and parcel of the application process, the most your son or daughter can realistically expect to borrow is four times their annual salary.
And that shows the scale of the problem, because even buying in the cheapest part of London, your child will need to be earning £75,000 a year to buy on their own – which explains why the average age of a first time buyer in the capital is now 31.
Last week a survey by Legal & General revealed that if the Bank of Mum and Dad was a mortgage lender, it would be the 10th largest in England. On average, those parents who are offering their children financial help to get on the housing ladder are now lending around £24,000. That’s the equivalent of £6.1 billion annually.
So, if you’re worried about the prospect of your children being able to put a roof over their heads without spending a fortune on rent and having no asset to show for it, what are the options for giving them a helping hand.
The obvious option, if you’re in the position to do so, is to offer financial assistance. But it is also possible to offer non-financial support if that suits your circumstances better.
Before looking briefly at each option, it’s important to remember that any help you give your child – even if it doesn’t involve lending them money – could have serious financial consequences for you and you should speak to an independent financial adviser to be clear on the risks.
Options that involve giving your child a cash lump sum
There are a few ways of doing this:
Gift money: Helping your child by gifting them a decent deposit may well increase their chances of accessing an affordable mortgage. In general, the higher the deposit, the better the rate and the lower the monthly repayments. The average deposit in the UK is 15% of the house price, but it can be as low as 5% – and obviously it can also be higher. Any financial gift may have an Inheritance Tax implication.
Lend your child money: Lending money and either charging your child a monthly repayment or agreeing what sum you’ll be repaid when the house is sold is another way of offering financial support. If a loan is to be repaid on sale of the property, it may be worth considering having a deed of trust drawn up by a solicitor to formalise the arrangement. Although your child should not have to pay income tax on this money, you should check with your financial adviser. Bear in mind, too, that there could be an impact on any means-tested benefit you child may claim in the future.
You might also consider a secured loan or equity release from your own property – but these come with certain risks and you should get professional advice before going down either of those routes.
Options that don’t involve giving a cash lump sum
If you don’t have the wherewithal to offer help through a cash lump sum, or you wish to offer them support in a different way, there are a few options you can consider:
Be a guarantor: This means your income will be taken into account on the mortgage application, potentially allowing your child to borrow more. As the name implies, being a guarantor would mean you having to take on the repayments for your child if they became unable to meet that commitment themselves.
Buy jointly: Again, and depending on the arrangement you reach with your son or daughter, you will either be liable for paying half the mortgage or meeting any repayments if they can’t afford to. The potential benefits of buying jointly are that your child will be able to borrow more and you would also own a share of the property.
Your child could also look at an offset mortgage, which would allow you to make repayments or pay off a lump sum when it suits you – but gives you the flexibility of withdrawing that support in the future.
You might also consider a mutually exclusive mortgage deal. Under this scheme, which is not available from all lenders, you would place savings into an account linked to your child’s mortgage. You would still earn interest on those savings, but they would also guarantee the mortgage debt – meaning your child could access the benefits of a competitive rate or repayment amount without the need for a deposit.
As with all big financial decisions, you should consider your options carefully and seek advice.
If you’re looking to help your child get on the housing ladder, come and talk to us as well and see how we can help you to make the right choice to suit you and your child.
Want to find out about your mortgage options? Take a look at our short guide to remortgaging.
To find out more about our friendly and professional mortgage service, fees and what we can do to help make sure you’re not paying over the odds for your mortgage, why not visit www.oportfolio.co.uk or give us a call on 020 7371 5063.
Oportfolio Limited is an appointed representative of Primis Mortgage Network, a trading name of First Complete Limited which is authorised and regulated by the Financial Conduct Authority
Your property may be repossessed if you do not keep up repayments on your mortgage.
Oportfolio Ltd fees are payable on application. We charge a broker fee for property purchases of £495 and a remortgage/further advance fee of £395. Our product transfer fee is £295.