There are many ways you can help your child get on the property ladder. Some parents allow their children to live at home rent-free to help them save up for a deposit. Others just offer cash. Here are some of the ways you can help:
Contribute to the deposit
A sizeable deposit helps in many ways. Having at least 10 per cent of the value of the property they want to buy, gives the first-time buyer a wider choice of mortgages and a chance to secure a lower rate. The difference between loan for 90 per cent of the value of a property and 100 per cent of the value of the property can be as much as 1 per cent. Putting down at least 10 per cent will also help the first-time buyer avoid a higher lending charge. This is a form of insurance some banks charge to those who borrow 95 per cent or more of the value of the property.
Some parents contribute to the deposit as part of their inheritance tax planning. Inheritance tax is charged at 40 per cent on estates over £275,000. Cutting down the size of your estate now can ensure less of it goes to the taxman when you die. The gift is tax free provided the donor survives for the next seven years. However, sums over £3,000 will be liable to tax if you meet your maker before then.
Parents who do not have ready cash sometimes remortgage their own homes to raise the funds. Interest rates are still relatively low and falling. Tapping into the equity under your roof could be an option provided you can cope with the extra monthly payments.
A joint mortgage
You can help boost your child’s buying power by taking out a joint mortgage. That way, the amount you can raise will be based on your combined income. This is good if you are mortgage-free and still earning but if you have another mortgage and other debts your borrowing power will be reduced.
If you are taking out a joint mortgage, you need to decide whether to go for a joint tenancy, a form of ownership usually favoured by couples as both parties own the property equally, or tenancy in common, where each party owns a particular share of the property. However, most joint mortgages are offered on the basis of "joint and several liability". That means that if your child stops paying you are liable and vice versa
There are tax implications too. If you already own your home, you will have to pay capital gains tax on your share of the property when it is sold. Equally, if your child wants to buy you out at a later stage, he/she may have to pay Stamp Duty, if your portion of the property is over the £125,000 Stamp Duty threshold.
Acting as a guarantor
By acting as a guarantor, you agree to step in and cover your child’s debt if he or she defaults. By having you as a safety-net, lenders are more likely to advance larger sums to your child provided that you earn enough to cover the entire debt. Both of your incomes will be assessed. However, as the child will be paying the mortgage on his or her own (unless disaster strikes) it is important not to overstretch. The mortgage and the property will be in the child’s name so there is no capital gains tax liability for you.
However, lenders are cautious about extending this arrangement on loans above 90 per cent of the value of the property. A deposit is still important.
Special Deals
There are some options which bridge the gap between acting as a guarantor and taking out a joint mortgage. Both the Bank of Ireland and Bristol & West offer the “First Start” mortgage where the parent’ income (after their own borrowing commitments) is added to the child’s. The parent is not a guarantor but jointly responsible for the loan and repayments. However, unlike a joint mortgage, the parent’s name appears only on the mortgage but not the deeds. This means that if the child wants to take over the entire mortgage at a later stage, the parents will not have to pay capital gains tax.
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