Helping your children buy a home

House prices are high, wage inflation is low and rents are amongst the most expensive in Europe. It’s no surprise that we are seeing an increasing number of parents helping their sons and daughters to buy their first home.

Boosting your child’s deposit is vital to helping them get a more affordable mortgage rate. Getting a mortgage with a 5% deposit is difficult and still relatively expensive even with 10%.

So what are your options when helping your children onto the property ladder?

 

Gifted Deposits

The most common way we see parents helping their children to buy is by simply giving their children money towards part/all of the deposit, this is called a ‘Gifted Deposit’.

Whilst this seems like a very straightforward route, it involves more than simply transferring funds into your child’s bank account.

We frequently encounter parents who aren’t aware that there are steps that need to be taken in order to legitimise their contribution, as conveyancers will have internal anti-money laundering procedures to adhere to.

Therefore, it’s important you take the following steps to make sure your gift is legal and above board…

  • Write a letter - Any large sum of money contributing to a portion/all of the deposit will need to be confirmed by a written letter to your child (and a copy for their conveyancing solicitor) to confirm the money is a true non-repayable gift and not a loan and that you will have no legal or beneficial interest in the property. The Conveyancer will ask you to complete a Gifted Deposit Declaration and provide appropriately certified Identification along with a copy of your bank statement showing the gifted funds are available.
  • Inform the mortgage lender - If you are gifting a deposit or funds towards the deposit, make sure your child informs their mortgage lender from the beginning as they will likely have their own rules when handling gifted deposits. If you fail to inform the mortgage lender, your mortgage offer may be affected or delayed. Your child’s Conveyancer has professional obligations to the Lender to report any gift element of funds.
  • Provide ID - The conveyancing solicitor will need to run legal checks on you if you’re gifting a deposit, therefore be sure to provide them with an appropriately certified copy of your ID and proof of residential address (these can include driving license, utility bill and/or bank statements) as early as possible to prevent any delays.
  • Proof of funds - During the conveyancing process, your child’s conveyancing solicitor will ask for proof of funds for any large sums of money appearing in your account, this is a standard professional obligation under Anti Money Laundering (AML) procedure that the conveyancing solicitor has to undertake. Different solicitors will have different rules as to what constitutes adequate proof but it any case, it’s always better to be thorough – the more proof the better.

It’s well worth bearing in mind that if you die within 7 years of giving the gifted deposit, and your estate is liable for inheritance tax (worth over £325,000), your child may have to repay a percentage of the sum.

 

Mortgage options

Mortgage lenders across the country are responding to the heavy generational decline in home ownership, by offering more mortgage options that allow parents to provide financial support for their children.

 

Guarantor mortgage

By being a guarantor on your child’s mortgage you are essentially guaranteeing the mortgage debt, it passes some/all of the liability for the debt onto yourself.

Typically, as the guarantor, you will put up your own house to secure the debt of the property your child is purchasing.

The key benefit of this is that lenders will be more willing to part with cash than they usually would if your child was applying for the mortgage individually.

However, this option does come with serious potential risk. In the worst case scenario, if your child defaults on their mortgage payments due to illness, unemployment, divorce etc... You will be responsible for paying the entire shortfall on the mortgage.

 

Family Offset Mortgage

With a Family offset mortgage, you will tie up your savings in an account linked to your child’s mortgage. Your child will have no access to the money, it simply acts as a deposit for the property.

This option will lower interest rates on the mortgage as the savings amount will be deducted from the amount being borrowed.

The key benefit is that you won’t actually be giving away any money like you would with the guarantor mortgage, although your money will be tied up until the value of your child’s mortgage is worth 75-80% of the property value.

 

Joint Mortgage

A joint mortgage means joint ownership of the property.

This means both of your names will be on the title deed to the house and you will be equally responsible for keeping up the mortgage payments.

This option allows you more control over the property and future transactions, ideal if you feel your child is too young, inexperienced or immature to handle the responsibility of full home ownership. It should also allow your child to borrow more than they would on their own.

But beware, if you already own your own home, you will be liable to pay an increased stamp duty rate on the new property as it will count as a second home. For more information on increased stamp duty click here.

Also, age can often be a factor in the length of mortgage you will receive, as lenders don’t typically like the mortgage terms extending beyond the holder’s 65/70th birthday. Considering a typical mortgage lasts around 25 years, if you’re on older parent this option may leave you with larger than desired monthly repayments.

 

If you are buying and selling a house and are looking for an experienced, full service conveyancing team to guide you through the process, give our Residential Property team a call on 0161 930 5151, e-mail residentialpropertyteam@gorvins.com or fill out our online contact form for a free, no-obligation and confidential discussion about your property.

Author | Reema Mistry

February 3, 2017

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