Rising interest rates and the cost of living crisis mean it’s more difficult for first-time buyers to get on the property ladder. People are increasingly relying on the so-called “Bank of Mum and Dad” for a helping hand, but what are your options?
Over the last few decades, house prices have increased at a far faster rate than wages. So, it’s difficult for young adults to save the deposit they need and secure a mortgage that’s affordable.
According to a report in the Telegraph, the number of first-time buyers relying on parental help is on the rise again. It’s estimated that almost half of first-time buyers will receive some form of financial help from their parents in 2023 and 2024. For many, it’s the only way they could achieve homeownership goals.
As a parent, you have more than one option if you want to lend support. Here are five ways you could help aspiring homeowners take that important first step.
1. Gift or loan the deposit
Gifting during your lifetime to help children get on the property ladder has become common. Estate agents Savills previously estimated that parents would lend a total of £25 billion between 2022 and 2024.
If you’re in a position to do so, gifting a lump sum to go towards a home can provide children with a significant boost. If you will need the money later in life, such as to fund retirement, you may want to provide a lump sum as a loan.
When giving money for a deposit you should be clear about whether it’s a gift or loan. For loans, seeking legal advice could help make sure both you and your child understand when the money will need to be paid back and provide you with some protection.
2. Use your savings to help them get a family mortgage
A family mortgage could be a useful way to provide financial support if you have savings but they’re earmarked for future use. They work in a similar way to an offset mortgage.
Your money would be placed in a savings account for a defined period, where it would earn interest. This money acts as a guarantee against your child’s mortgage, so they may be able to put down a smaller deposit as a result. In some cases, your child wouldn’t need a deposit at all when using a family mortgage.
Assuming your child meets their mortgage repayments, your savings would be returned to you, along with the interest earned, once they’ve built up equity in the property. However, if they miss repayments, you could lose some or all of your savings.
3. Act as a guarantor on their mortgage
If your child can’t get a mortgage because they’re deemed too much of a risk by lenders, acting as a guarantor could be an option.
You’d take on some of the risk as you’d be liable for the mortgage if your child missed payments. Your own home may be used as security, so you could risk losing it if your child defaults on the mortgage.
This could also be an option if your child needs help securing a larger mortgage to afford a property as lenders may be more flexible.
4. Take out a mortgage with them
You could also take out a mortgage with your child. If they’re struggling to borrow enough to buy a property, this option could provide a boost and they may benefit from a lower rate of interest.
A joint borrower sole proprietor mortgage could be useful here. Your name and income could be used on the mortgage application, but only their name would appear on the property deeds. While this option may increase how much your child can borrow, make sure it’s affordable to them, including if interest rates increased.
Keep in mind that you would be liable for the mortgage if your child couldn’t pay. Going on the mortgage could also affect your options if you want to borrow money in the future.
5. Let them move home
Finally, letting your children move back home can help them save a deposit. As rent and utility bills soar, some adult children living independently find they have nothing left at the end of the month to add to their savings. If you have the space, it could help them save up the deposit they need much quicker.
Dubbed the “boomerang generation”, Aviva previously found that a fifth of adults living away from their parents were contemplating moving back to cope with the rising cost of living.
If your children do move home, be clear about whether they’ll contribute toward household bills from the outset. It could also be useful to discuss their savings target with them, so you’re all on the same page.
Contact us to talk about mortgage options if you want to lend support
If you’re helping a first-time buyer get on the property ladder and have questions about the different mortgage options, please get in touch. From which lenders will accept a loan you’ve given them to use as a deposit to answering questions about family mortgages, we can talk you through your options.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Think carefully before securing other debts against your home.