Parents and grandparents can help children buy their own home without having to hand over money.
It’s no surprise so many young people feel their dreams of owning a home are slipping out of reach. A new report by the Resolution Foundation has found that one in three UK millennials will never own a home and half will be renting into their 40s.1
Meanwhile, the latest data shows that house prices have increased by 30% since early 2013, and 54% in London, bringing the average UK house price to £211,792.2
With property prices continuing to soar, many first-time buyers will feel their only option is to turn to the bank of mum and dad – or even granny and grandad – to help them buy their first home. Nowadays, around 60% of under-30s get help from their family to buy a home3, while one in ten grandparents have gifted grandchildren with enough money to secure a mortgage on a property.4
However, those who are in the fortunate position of being able to help their children need to be sure they are not putting their own financial security and retirement comfort at risk.
If you are able to help a family member get on the housing ladder, what is the best way to go about it? Give or lend? What about tax issues? What if you need your money back?
The simplest option may be to gift money to your children or grandchildren – thereby providing or increasing their deposit. This will reduce their initial mortgage debt and monthly repayments. However, not everyone is able to gift large amounts of money; and even those with the available funds may be reluctant to part with so much cash.
Two is better than one
Of course, not everyone is willing to lock capital away or borrow against their assets, so a further option is to utilise the incomes of higher-earning family members. For instance, a parent can apply for a joint mortgage with their child. This takes both individuals’ incomes into account to determine if the mortgage is affordable. It is then up to the family to work out how repayments are made.
Unfortunately, many joint mortgages give rise to potential tax issues if the parent already owns a property. To overcome this problem, some lenders now offer mortgages which do not require the parent to be on the title deeds.
Parents can avoid exposure to Stamp Duty and other implications of purchasing a second property, such as tax on any profit made from a sale. Furthermore, because the property is not included in the parent’s estate, it avoids a potential Inheritance Tax problem.
Given the challenges faced by younger generations, there’s a growing need for families to have a more joined-up approach to financial planning. The important thing is to find a balance between the demands of family members and longer-term goals, while also being aware of the finer tax issues. You also need to factor in how your children or grandchildren feel about you becoming part of the equation in any house purchase. Preparation is key, and it can really help to work with a mortgage adviser on finding a solution that suits all family members.
The home on which the mortgage is secured may be repossessed if the mortgage borrowers do not keep up repayments on the mortgage.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
1 Resolution Foundation, Home Improvements, April 2018
2 Nationwide Building Society, data to Q1 2018
3 Tesco Bank Home Buyers Survey, September 2017
4 OneFamily, September 2017