3 practical ways to help your children or grandchildren to buy their first houseBack
Affordability is now one of the biggest barriers to home ownership for young people.
According to a report from Schroders, UK house prices in the 1990s were four times the average earnings; today they are more than eight times average earnings. Since most mortgage lenders place limits on how much someone can borrow based on a multiple of their earnings, this sharp increase has pushed home ownership outside the realm of possibility for many first-time buyers (FTBs).
To help FTBs navigate this challenge, mortgage lenders and the UK government have created a number of schemes that address the affordability problem.
Despite this, figures published in FTAdviser showed that less than one-fifth of under-30s were aware of these new affordability options that could help them to get onto the property ladder. Additionally, around half of them relied on parents to provide advice about buying their first house.
If your children or grandchildren are struggling to buy their first home and you’d like to help them, there are several ways that you could do this. Here are three options you should be aware of.
1. Shared ownership schemes
Shared ownership schemes allow the buyer to purchase a share of a house equating to 10-75% of its value, while paying rent to a landlord on the remaining portion. Over time, the buyer may have the opportunity to buy more shares in the home in a process called “staircasing”. As they buy more shares, they’ll pay less rent, since the landlord will own fewer shares in the house.
This could make home ownership more affordable for your child if they don’t have enough of a deposit or can’t afford the mortgage payments to buy the home outright.
It is important that your child is aware of the different models of shared ownership that are available, since a new model was launched by the government in 2021.
The new model made several changes, including:
- Changing the size of the minimum share you must buy
- Introducing a new form of staircasing that allows you to buy additional 1% shares in your home each year
- Giving you greater control over when you can sell your home.
Both old and new models of shared ownership homes are available to buy now, so make sure your child checks which model they are buying.
FTAdviser reported that interest in shared ownership schemes increased by half among 18- to 30-year-olds once the details were explained. So, helping your children or grandchildren to understand the options available to them could be a big help in enabling them to access home ownership.
2. Gifting a lump sum for the deposit
If you’d like to gift some money to your children or grandchildren, this could help them to raise enough of a deposit to afford a new home.
According to the HomeOwners Alliance, the “Bank of Mum and Dad” helped roughly half of FTBs to afford a home in 2020, lending £20,000 on average. Of the buyers who had help from family members, two-thirds said that they would not have been able to buy a house for at least five years without it.
If you are gifting money to a family member, there is no limit to how much you can gift them in a lump sum, but the mortgage lender might ask you to confirm in writing that the money is a gift rather than a loan.
This will enable them to assess affordability before offering a mortgage, because any repayments the buyer might be making to you will affect how much they will be able to repay to the lender each month.
Even though no tax will be immediately payable, your child may be required to pay Inheritance Tax (IHT) on the gift if you pass away within seven years of gifting the money and you have none of your nil-rate band (NRB) for IHT remaining. Make sure you speak to a tax expert if you are concerned that your child or grandchild may have to pay IHT on the gift.
It's also important to make sure that gifting money wouldn’t compromise your own standard of living. According to FTAdviser, fewer than one-third of people who have gifted money to their children considered the likely cost of later-life care before they parted with their cash.
If you gift more than you can afford, you could face a dip in your standard of living, or worse, risk running out of money during retirement. It’s important to consult a financial planner before you make any decisions, because they will be able to help you assess how much you can gift without adversely affecting your own finances in the long term.
3. Be a guarantor on a mortgage
If you’d like to help your child financially but don’t want to offer cash directly, another option is to act as a guarantor on the mortgage.
Guarantor mortgages help FTBs to borrow more by using your savings or the equity of your home as security against the mortgage. The buyer will be able to borrow up to 100% of the value of the house, which is particularly helpful for those who have not been able to save a deposit.
As a guarantor, you won’t own any shares in the house, but you are liable if your child is unable to keep up their mortgage repayments. It’s important to consult a financial planner to make sure this would be feasible for you if you ever needed to cover the monthly mortgage payments in the future.
Get in touch
If you have a child or grandchild you’d like to help onto the property ladder and want to understand the best options for your family, we can help. Email email@example.com or call 020 8946 8186.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
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.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.