Seeing your child struggling financially is never easy, and in these difficult economic times, many young people are struggling to get onto the property ladder. Buying a house is emotionally and financially draining, and you naturally want to help your child as much as possible.
There are various ways in which you can do this, but you need to be aware that there are also pitfalls. You need to make sure that you review all the options and go about it in the right way, otherwise you, and your children, may face problems in the future.
Why might my child need help?
Getting on the property ladder is very difficult and very expensive. Many first time buyers find it difficult to secure an affordable mortgage. Soaring house prices, interest rates and competition make it almost impossible for some first time buyers to get their feet in the door.
What are my options?
Buying outright: The easiest way is to either buy the house outright, although this option is not available to many, or to give your child enough money to cover the deposit as a gift. Buying the house outright is likely to give rise to the fewest problems in the future, and the gift is exempt from Inheritance Tax (IHT), provided that you live for 7 years following the date of purchase.
Alternatively, you could provide the deposit for a house (around 25% of the value of the property is good, but 10% will allow you a broader choice of deal), but be aware that there may be potential IHT consequences if you do not live for 7 years following date of purchase. You can, however, make use of your annual exemption for gifts. Any unused exemption can be carried forward, so if you’ve not made a gift in the preceding year, you can give your child a deposit worth twice the annual exemption.
Or, you could provide help with mortgage payments. You should seek professional advice before doing this as you can achieve 100% IHT relief if you can show you are making regular gifts in excess of your day to day needs.
Acting as guarantor: Many parents choose to act as guarantors on their child’s mortgage. This allows a larger sum to be borrowed as it takes into account both your income and your child’s. However, it’s risky as your assets are at risk if your child cannot meet mortgage payments.
The choice of which option is most appropriate must take into account various factors, including age, family circumstances, income, capital and eventual intention.
Using your own home: You can borrow money against your own home. There are two ways of doing this. The first is to borrow money in the form of a secured loan, using your home as the security. You’ll need to shop around to find the best deal, but beware: your home, as well as your child’s, may be at risk if things went wrong.
Alternatively, you can use an equity release scheme called a Lifetime Mortgage to borrow money against your own home.
And now, some words of warning:
Financial circumstances can change. You should consider whether you would still be able to afford the gift if your financial circumstances changed for the worse.
Once given, the money legally belongs to your child and cannot be reclaimed. If your child should die, the money will form part of their estate and will go to the beneficiaries of their will.
You should always get professional advice before making any decision, preferably from a property solicitor, who can draw up any agreements regarding investments or repayments of loans.
You need to protect your investment, naturally, but you also need to protect your relationship with your child. As money is generally quite a fraught subject within many households, you cannot take a good relationship for granted. And don’t let sympathy for your child’s situation lead you to overextending yourself, or exaggerating your income to get a larger mortgage.
Lastly, although you might have a stake in the home, you should remember that it is your child’s home, and you should respect their privacy. Don’t make a habit of turning up unannounced, and don’t try to dictate who can and can’t visit.
Advice from Andrew & Co. LLP, an independent firm of solicitors based in Lincoln and Newark, specialising in residential property law.