For first time buyers, getting onto the property ladder seems to be harder and more expensive than ever before. With the rise in cost of living and inflation, saving for a house can be a long and challenging process for younger generations.
Due to these challenges, it has become common for parents and grandparents to want to help their children buy their first home – whether that’s purchasing the property outright or gifting money towards a mortgage deposit. We take a look at the best ways you can help to support your child in the house-buying process.
Gifting the deposit
One of the most straightforward ways to help your child or grandchild purchase their first home is through a gifted deposit. You can either contribute a figure towards the lump sum or gift the entire deposit amount. Typically, a 10% deposit will open the door to a wider variety of mortgage lenders.
Unlike a loan, gifted deposits are usually given with the understanding that the money doesn’t need to be repaid. You will have to declare your intention when you’re gifting this amount in a letter, stating whether you intend to live in the property or any legal interest in the property being purchased. You will also need to provide bank statements showing the funds and how you earned this money, along with ID documents like a passport.
Some solicitors may charge additional administration fees for processing gifted deposits, so this is something to bear in mind if you choose to go down this route.
Using an equity release scheme
Some parents and grandparents opt to use an equity release scheme called a ‘lifetime mortgage’ to borrow money against their own home as a way of assisting other family members with the-house buying process.
This money is borrowed on the basis that it will be repaid after the sale of the parents’ or grandparents’ home, when they pass away or move into long term care. Typically, from the age of 55 onwards you can borrow an amount starting at 25% of the value of your home to a maximum of 50% (depending on your age and health) and can choose if you wish to make repayments or not on an ad-hoc or regular basis. Interest is added to the amount you borrow and compounds if no payments are made so this is something to be aware of.
Parents or grandparents entering into an equity release contract should note that it can change their personal tax position and impact their eligibility for state benefits both now and in the future. It will also reduce the value of their estate for their beneficiaries.
Buying a house in your child’s name
There is an option for you to purchase outright and put the property in your child or grandchild’s name, however the legal complexity and tax costs of this may not make this a viable option for many. As it would be classed as a second property, you will have to pay stamp duty immediately at a higher rate (usually 3% above the standard rates) and capital gains tax may also apply. If your child is a first-time buyer, they wouldn’t have to pay either of these when they purchase.
Adding another layer of complication is the conveyancing process when transferring the home into your child or grandchild’s name – this can be quite complex and will add additional costs onto your conveyancing bill. On balance it may be simpler and more cost effective to gift the money to your child in this instance.
In short, there are a number of different ways you can help to support your child or grandchild get onto the property ladder and some options may be more appropriate than others. In addition to the mechanics of how you can support them it’s also important to ask yourself questions like ‘Have I made allowances for this in my financial plan?’ and ‘Can I afford to do this?’.
The emotional aspect of this life-stage event is also an important thing to think about. Do you want to be able to experience the joy of helping your child or grandchild buy their first home while you’re alive? Or would you prefer to pass on your estate to beneficiaries after you pass away? Speaking to a financial planner will help you to make these decisions and plan accordingly.
To reach out to our team of advisers, who work together to solve complex problems and help you achieve your goals – please contact us today.