It’s a tough environment for first time buyers. Rising house prices and stagnant wage growth have pushed up the average age of buying a first property to 33. What’s more, first time buyers need to borrow 18 times more than those in the 1970s.
Given this context, it’s unsurprising that more and more parents and grandparents are giving their loved ones a helping hand to get on the property ladder. However, because there are several ways of doing this – all with their distinct advantages and disadvantages – it can be hard to find the right way to help out. Here is a breakdown of a few common ways of giving the next generation some extra support:
Gifting a deposit
Gifting a deposit might seem like the most straightforward way of helping your child, but there could be unexpected tax implications. For instance, cash gifts of over £3,000 in one year may be subject to inheritance tax, if you die within seven years of making the gift.
If you do think gifting a deposit could be a good option, you might want to act sooner rather than later. A cross-party group of MPs is currently proposing an overhaul of the IHT system where all gifts over £30,000 will be subject to a flat 10% tax rate.
A common alternative to directly gifting cash is to use a guarantor mortgage. These mortgages are sometimes referred to as 100% mortgages because they don’t require the borrower to put down a deposit. Rather, a parent will lock up cash in a savings account with a lender or agree to use their property as collateral if the buyer defaults on repayments.
If you use savings as security, you’d normally need to place either 5% or 10% of the cost of a new property into a savings account with the lender for several years (three or five years are the standard). The interest returned varies from lender to lender, with some not paying any at all.
These mortgages allow you to buy a property together with your child. Notably, this option increases your child’s chance of getting a mortgage in the first place as your income will be taken into account.
However, it can be expensive and risky. As your name will be on the deeds of your child’s home, you’ll need to pay the stamp duty surcharge if you already own a property. What’s more, you’ll be jointly responsible for repayments.