Bank of mum and dad – how you can help your children onto the property ladder.
More than a quarter of property purchases are now funded by the bank of mum and dad. If you are one of the generous parents handing over the cash, what are your options?
Can you actually afford it?
Perhaps the most important thing to consider is if you can afford to help out. Some parents shave savings or investments that they are able to cash in, but others may need to borrow money against their home to help their children out.
Many parents remortgage to release equity in their home, whilst those who don’t like the idea of switching mortgage deals may get a loan secured on their home instead.
Equity release schemes are favoured by older borrowers, these allow you to borrow money against your home, with capital and interest repaid after your death or when the property is sold.
Like most things, there are pros and cons to equity release schemes – ( you can find a few here. )
Gifting money can cause problems for inheritance tax (IHT). The donor must live for seven years after gifting the money to be exempt of IHT. Obviously, nobody knows when they are going to die, which makes IHT planning tricky.
Many parents favour the idea of lending their children money – with the hope it will be paid back at some point in the future, for example, when the property is sold.
A loan document should be drawn up with any interest payable and the repayment schedule clearly detailed. This should be signed by both parents and offspring. The document should set out what will happen to the money should one of the parties die, and what would happen if the parents needed the money back.
If your child is buying a property, any loan agreements would need to be factored into the mortgage lender affordability assessment.
Act as a guarantor
A popular option amongst parents, acting as a guarantor is a great way to help your child onto the property ladder. Your income will be take into account when agreeing a mortgage, allowing your children to borrow more.
Be aware that there are risks involved, as you would be responsible for paying mortgage payments if your child were unable to do so. There are options to taken out joint mortgages, however the idea of the parent legally owning a share of the property is often unappealing for both parties, and both would be liable for joint mortgage repayments.
Some mortgage lenders offer products which allow parents to offset their savings against the child’s mortgage – meaning they usually qualify for a much cheaper deal.
For professional, reliable mortgage advice get in touch with Mortgage Solutions of Wakefield, we’d be happy to help.