Stop rattling around a large home that’s far beyond your needs and sell up now. This controversial call to action was delivered last week by Robert Peston, the former BBC economics editor, who told The Times Cheltenham Literature Festival that parents should be “less selfish” and downsize to help their children buy a property. You may not wish to go that far, but there’s no denying that first-time buyers need all the help they can get. They are having to find £7,870 more now than a year ago, and for increasing numbers their only hope of getting on to the ladder is opening an account at the Bank of Mum and Dad.
According to figures published this week by the Office for National Statistics, the average price of a first-time-buyer home increased by 3.8 per cent to £215,000 in the year to August, and research from Your Move and Reeds Rains estate agents shows that the typical deposit rose by 9 per cent to £26,741 between May and September alone. The sums are far higher for London and, according to KPMG, first-time buyers in the capital need to earn £77,000 to be able to buy; the average salary is £28,000. What can those who want to plug this gap for their children do? We answer your questions.
How much will I need to help with a deposit?
The minimum required is 5 per cent of the property’s value, and if you can bump this up, a wider range of deals will be available at superior interest rates. The best are reserved for borrowers with 40 per cent or more. If your child is just below a significant level — with a deposit of, say, 29 per cent — finding the extra cash to hit 30 per cent will open up the next tier of better deals.
Many parents are taking advantage of the new pension freedoms to provide a cash injection for their children, and this has contributed to an increase in the number of buyers relying on cash gifts for a deposit to 64,000, a rise of 46 per cent, according to the conveyancing service myhomemove. However, if you decide to gift cash, there are tax implications.
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Lindsey Kutten, a director at PwC, says: “Any money gifted rather than lent could have inheritance tax consequences, and if you acquire a legal right in your child’s property then there will be capital gains consequences to consider as well. You should bear in mind that any gifts to your child are just that. The cash or property becomes theirs for all purposes and they can do with it as they please.”
Borrowers using gifted cash also need to provide evidence of the money’s origin for money-laundering checks. Lenders often require a letter of consent and a bank statement from the person gifting the deposit — being prepared at an early stage can prevent delays.
What if I don’t have a lump sum?
You can use your income to boost what your child can borrow with a guarantor mortgage, where you agree to cover the debt if your child defaults, but these are far less common than they used to be. David Hollingworth, of London and Country Mortgages, says: “Some lenders can consider it in the right circumstances, where the child should be able to take on the mortgage in their own right in the foreseeable future — for example, a young trainee professional who is likely to see an increase in income.”
Virgin Money and Market Harborough Building Society offer these loans, and the latter will also consider putting a charge over some of the value of your property to lower the interest rate for the buyer. Another option if you have equity in your home is to remortgage, but many lenders apply a maximum age for repayment of 70 or 75. Bath Building Society and National Counties Building Society (and its Family Building Society offshoot) will assess maximum age based on circumstances and can go beyond 75.
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And if I want a slice of the profit?
Joint mortgages allow a parent and child to be treated in the same way as a couple buying together, which has the advantage of allowing you to benefit from owning a stake in the property. The downside is that, because it will not be your primary residence, capital gains tax may be due when it is sold, and you can be pursued for the full debt if your child defaults. Lenders will also apply maximum age restrictions.
What if I have doubts about my child’s partner?
According to James Hender, of the accountancy firm Saffery Champness, protecting a gift against break-ups can be tricky. “Helping to set up a couple with a property is notoriously more complicated,” he says. “The timing of the gift — whether before or after marriage, for instance — can be crucial. If parents want more protection, then a loan to the child alone might be best, but this often complicates the family dynamic.”
Another option is using an offset mortgage. These let you use your savings to help your children but you retain ownership of your funds — you just need to commit to locking up the cash for a set period. They work by linking the loan to a special savings account, and some will pay you interest. With the Family Springboard Mortgage from Barclays you put 10 per cent of the purchase price into a “Helpful Start Account” and the borrower gets a 95 per cent mortgage at 2.89 per cent, with no application fee. After three years you get your money back with interest, at present 2 per cent, as long as payments are kept up to date.
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The Family Building Society also offers a 95 per cent mortgage, and with its account your money, in effect, reduces the total amount of outstanding debt. If your child has a £200,000 mortgage and you put £30,000 in a linked account, the child pays interest on only £170,000. The present rate is 3.34 per cent, fixed for three years.
Is a trust a good idea?
You could use a trust to allow your child to use a property for a period without giving them ownership, but these can be complex and expensive to set up. Kutten says: “If the you are worried that your child may not make good life choices or might get divorced, this is one of the situations where a trust may be beneficial, but a simpler alternative would be to make a loan rather than an outright gift.”
However, if this is formalised it could limit your child’s options and reduce the amount they can borrow. Hollingworth says: “The odd lender, such as Santander, can accept deposit funds from a loan, but they will require the monthly payments to be factored in to the affordability assessment and reduce the amount that can be borrowed.”
Case study
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Stuart and Sian Nicholls used the new pension rules to get a lump sum to buy a flat for their son Maximilian, 18, who is studying dentistry at Kings College London. He will occupy the two-bedroom flat in Barratt’s Catford Green development in southeast London while he’s on the course, but it’s very much an investment property for the parents.
Mrs Nicholls says: “If your child is doing a lengthy degree then it makes sense to invest in a property that will serve them for four to six years. Stuart took advantage of the change in pension rules for over-55s and was able to access a lump sum, so we are fortunate not to have a mortgage.
If Maximilian stays in London after he has graduated then I am sure he would pay some rent to his old parents! Our other son, who is two years younger than Max, may also attend university in London, so the flat will be occupied by our student children for some time.”