5 ways parents can help their children buy a house
As we reported earlier this month, a new study has found that the Bank of Mum and Dad has become the UK’s unofficial 9th biggest mortgage lender.
According to research carried out by Legal and General, parents are set to lend £6.5 billion to their children this year to help finance a property purchase – and their money will be involved in more than a quarter (26%) of all house transactions.
But how can parents help get their children on the property ladder, and what are the best ways they can use their money to help out their children? If you are starting to think about offering assistance to your kids to help them buy a house, then we’ve outlined some of the more common financial ways you can help them…
Give them cash as a gift towards a deposit on their house
Giving your children a cash lump sum that they can use as part of a deposit is probably the most common way parents can help out.
A sizeable deposit is an absolute must these days in order to get a mortgage, so unless your child is one of the very few who has managed to save a huge deposit of around 20% of the house value then they are probably going to need some financial help.
If you opt for this route then it is better that you give the money as a gift rather than a loan, as the mortgage lender will consider it as a debt that will eventually need to be paid back and factor this into their financial assessment of your child.
Use your savings as security on the mortgage loan
Instead of giving them a lump sum as a gift for the deposit, another option for parents is to offer up your savings as additional security for the mortgage. To do this, the mortgage lender will most likely need you to safeguard your savings for a certain amount of time so that they know the money will be available if it is needed to service the debt.
The main downside to choosing this option is that you won’t be able to access the money for at least a few years if you need it. You may also be losing money in terms of interest, as it is unlikely that the account the mortgage lender stipulates the money be left in offers you the most attractive interest rates.
An example of this type of mortgage is the Barclays Family Springboard mortgage, which allows first-time buyers to get a mortgage without any deposit as long as their parents (or any other family member) is able to provide 10% of the property price as security. The parents will need to set up a savings account with Barclays (called the Helpful Start Account) and put in 10% of the property value, and will get their money back plus interest after three years as long as the child has been keeping up with the mortgage repayments.
Use your home as security
Not all parents have the cash or savings available to help out like the above options, but if you own your own home then you can use the equity tied up in your house to help your child get on the property ladder.
This can be a risky option, as your house will be on the line if your child fails to keep up the payments on their mortgage – but it can be a good way for parents without the necessary cash to lend a helping hand.
Nationwide currently offer what they call a Family Deposit mortgage, which allows those with an existing Nationwide mortgage (or those who are prepared to switch to one from another lender) to borrow against the equity in their mortgage and gift those funds to a family member to use as a deposit on a new home. As both the parent and child have to have a Nationwide mortgage with this option, the options on rates are limited – but it can be a handy way to get that all important deposit.
Get a joint mortgage
Another option is for parents and children to get a joint mortgage, which can give your child a leg up on the property ladder while allowing you to keep some control over your money.
Applying for a joint mortgage means both of your financial situations will be reviewed by the lender and you will both be named on the house deeds – much like buying a house with your partner. A joint mortgage therefore means that you and your child’s finances will be linked, so you will be liable to pay the mortgage if they default on their payments.
Another consideration is that if you already own a home then you may be liable to pay a higher rate of stamp duty as you will technically own two homes.
Help your child save their own deposit
You can also provide more long-term financial help to your children by helping them start saving for their first home at the earliest opportunity.
Once they reach the age of 18 they will be able to open a lifetime Isa, which allows deposits of up to £4,000 each year – something parents can contribute to on a monthly or yearly basis.
The big benefit of signing up for a lifetime Isa is that the government will pay a bonus of 25% if your child uses it to buy a house worth up to £450,000. Only a very select few lenders currently offer lifetime Isas though, so in the meantime it might be worth encouraging your child to open a Help to Buy Isa to get them started.