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Helping your children onto the property ladder

 

The ongoing stagnation in the housing market coupled with tougher mortgage lending rules mean that young people are finding it increasingly difficult to make that first important step onto the housing ladder.

This has a knock-on effect for those on the next rung as they cannot sell their homes to first-time buyers, enabling a move to a larger property.  Soaring property prices over recent years have also contributed to the problems faced by potential first-time home owners.

Lending institutions are basing their calculations on LTV (Loan To Value) and many banks and building societies offer a number of mortgage options; however for many young people, especially those in  highly expensive areas of  London and the South East, the dream of owning their own home seems to be receding rather coming closer.

Increasingly, parents are helping their children by providing some financial input and there are a number of ways that this can be achieved.

One of the easiest ways for parents to help is simply to gift (or loan) a sum of money.  However parents are strongly advised to seek legal advice (however mercenary this may appear) and it’s important to realise that conveyancers have to comply with money laundering regulations.  It’s also crucial for parents to draw up a loan agreement so that in the event of the couple marrying (or separating), for example, the position regarding the gift or loan is clearly laid out for all parties.

It’s also essential that the position of the loan is also covered in both parents’ wills, especially if there are other children in the family.  Add in to this any tax implications and it’s easy to see that legal and financial advice is essential before proceeding with any option.

Other forms of help are also available, but the importance of seeking advice cannot be over-emphasised.

Many parents will act as guarantor for their offspring’s new mortgage, but this does depend on having a good credit rating themselves.  Options include standing as guarantor for the entire mortgage, or for a top-up amount to enable the purchasers to obtain better interest rates.

Another option is to be a joint owner of the property; however this will have Capital Gains Tax implications so it’s important to be fully aware of this aspect.  

Family Offset Mortgages are a way of using savings to help the youngsters, with the savings remaining in the parents names’ and the money reverting to them at a later date.  Cash is placed into a linked savings account which forms a deposit and lowers the mortgage repayment.  Remortgaging of the parental home is another potential solution if the young person doesn’t have a deposit.

A recent report by the HSBC and the Centre for Economics & Business Research estimated that without parental (or in some cases grandparental) help, house sales worth £5.3bn would never have taken place.  The report further states that “one in five first-time buyers are relying on the bank of mum and dad to get them on the property ladder”. Another piece of research reports that the financial assistance provided by parents helped 100,000 buyers get their first home between 2008 and 2011. 

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