For those of us with grown up children or grandchildren trying to make the great leap into home ownership, we know only too well the struggle facing our younger generations.
In today’s property market, the bank of mum and dad – or even grandma and granddad – is under increasing pressure to help our loved ones on or up the ladder.
House prices and salary gap
It hasn’t helped that the gap between income and house prices has escalated to such an extent over the last 20 years that, even in the most affordable parts of England and Wales, buyers are having to spend six times their income to get a foot on the ladder*.
Homebuyers in the capital have it even harder. According to the Evening Standard, at £472,385 the average house in London now costs twelve times the average income, and are now worth 50 per cent more than their peak in 2007.
House prices are being further pushed up by property shortages, with estate agents reporting a record low number of properties available to purchase.
It means that today a quarter of all home owners, and over half of under-35s, are reliant on cash from loved ones to get them onto the property ladder**.
Giving a helping hand
For parents and grandparents with a lump sum readily available to fund a deposit, your only main issue might be how and when the money will eventually be repaid back to you, if this is something you expect to happen. Having an agreement drawn up with a solicitor may be worth considering.
For those who are not simply able to hand over a cash lump sum, but want to, the good news is that products from mortgage lenders have been popping up specifically for parents and grandparents who want to assist with a deposit.
For ease, we have compiled a number of ways parents and grandparents can help loved ones onto – or up – the property ladder in today’s challenging market.
Guarantor Mortgage / Loan
Guarantor mortgages allow prospective homeowners to take on a larger loan than they might have otherwise been offered, providing a close family member is willing to act as a guarantor.
You could have your income taken into account, or you may be expected to offer your own home as collateral, in which case you will need to have a decent amount of equity in the property (expect around 25% to be required).
If your loved ones keep up with their repayments then there will be nothing for you to pay and the property and mortgage in in your loved one’s name. However, should your children default on their payments, you will be expected to make up the shortfall.
Lending without being a guarantor
If you have a lump sum available that you are happy to loan as a deposit, then you could put your savings into an account linked to the mortgage.
There are two options to consider which work to lower the interest charges for your loved one (as the savings balance is deducted from the value of the loan), without them having access to the money you move into the account.
- A mortgage guaranteed with a savings account deposit: Your child or grandchild can be offered as much as 95% of the property value as long as you deposit the remaining sum of money as a deposit in a savings account tied to the mortgage. You will receive your money back in full (plus interest) at a time agreed at the outset.
- Family offset mortgage: This option is different because the interest on the savings you loan is used to assist your loved one. Instead of interest being added to your account, it is used to assist your loved one in the form of reduced monthly payments, or to shorten the lending term.
Of course, with both options your money will be locked away for an fixed amount of time, but as long as your loved one keeps up with the mortgage repayments on time then the money will be available to you again in the future, either with or without interest depending on which option you choose.
Shared ownership/joint buying
There is the option to take out a joint mortgage with your child or grandchild to help them take that first big step onto the ladder.
With a joint mortgage you will both have ownership of the property, so you will both be responsible for the repayments and the charges, and you will each need to demonstrate you can afford the repayments. This will involve going through affordability checks and having your finances scrutinized.
Once their circumstances change in the future they can remortgage and release you from the joint mortgage.
If the timing of your child or grandchild’s home purchase dream ties in with your own plans to move house, then you could raise the necessary capital by downsizing or moving to a less expensive area.
Plus, as long as you live at least seven years after gifting your loved one the money, there will be no inheritance tax to pay on the deposit you put down for their property.
It is important to consider your retirement comfort and financial security of course. You should consider if you will be happier in a smaller house, or if the equity in your home could be important to have available should you have a need for it yourself one day.
For homeowners without a cash lump sum readily available to help loved ones, and do not wish to downsize to free up the money, you can still tap into your tax-free cash with a lifetime mortgage.
By unlocking a cash lump sum from your property’s value, you could gift the deposit needed and effectively give your child or grandchild an advance on their inheritance at a time when they need it most.
Thanks to flexible new plans coming to the market, you can make regular or one-off payments on your plan to reduce or prevent the interest that would otherwise accrue, but only if you wish to.
Otherwise, the loan plus interest is only repayable when the plan comes to an end, usually when you pass away or move into long-term care.
Seek specialist guidance
With so many options to choose from, it is always recommended to seek the guidance of an independent specialist in retirement lending before making a decision.
Your independent Bower specialist will take the time to explain everything thoroughly, including how equity release will reduce the value of your estate and how it may affect your entitlement to some state benefits.
Speak to one of our specialists in retirement lending to talk through your options today. Call the Bower team on [tel].
*The Guardian Sept 2015
**L&G ‘The Bank of Mum and Dad’ report