Should you help your child pay their mortgage?

As mortgage rates have soared – hitting a peak of almost 7% in July 2023 - so have worries about repayments among the younger generations. 

According to the most recent Wealth Index Report by wealth management firm Saltus, these higher mortgage rates are having a significant impact on younger homeowners’ overall financial situation.   

“One in five (21%) say they see rising mortgage rates as ‘the biggest threat’ to their finances, and one in 12 (8%) have been forced to either reduce their mortgage payments or switch to an interest-only loan as a result of higher costs,” says Gianpaolo Mantini, Chartered Financial Planner at Saltus. 

With homeowners now facing remortgage bills that are hundreds of pounds a month higher it’s no surprise that more parents are stepping in to support their adult children.   

Saltus’ research found that, among older people with assets of at least £250,000, 70% are providing some sort of financial assistance to their offspring. 

In almost a fifth of cases, that support is coming in the form of help with their mortgage. 

But if aiding your child with their home loan is something you’re considering – maybe through a lump sum or transferring money into their bank account every month - there are potential issues you really should think about in advance. 

Consider Inheritance Tax...and your pension 

If you’ve decided to help your children out with their mortgage, it can be tax effective when it comes to things like Inheritance Tax – however, Mantini explains the steps you’ll need to take to achieve this: 

“Those who have surplus income can make regular gifts out of this income without Inheritance Tax implications. However, the parents must ensure that giving these gifts does not affect their own standard of living,” he says.  

Although regular gifts can be made free of IHT, to qualify for this exemption, HMRC will need evidence of both your income and expenditure to ensure that you can afford to help, without tightening your belt or dipping into your own savings. 

Therefore, it’s important to keep records of such spending to help the executor of your will when the time comes for them to work it out. 

Mantini adds that the Annual Gift Allowance means individuals can also give gifts of up to £3,000 each tax year IHT-free – therefore, parents can give away double that between them. 

But Mantini warns that Saltus’ research shows many people are dipping into pensions and other long-term investments to help their children out. 

“Reducing pension contributions to help cover adult children’s expenses is alarming as it could lead to knock-on impacts on their plans for retirement,” he says.  

This means it’s important to think about whether, in supporting your child with mortgage payments, you'll also be jeopardising your own financial security. 

Even if you have – or will have – sufficient daily retirement income, it’s also crucial to think about expenses you might face further down the line, such as fees for long-term care.  

Given the cost of a nursing home can be around £1,000 per week, it’s important to consider this in your long-term planning. 

Avoiding family fall-outs 

It’s important to bear in mind that any financial arrangement between family members has the potential to create problems and resentment, particularly if one child is being helped and another not.  

“Money can be an emotional subject and so any financial dealings in families need to be handled with extra care as they can get entangled in existing emotional issues,” explains Vicky Reynal, a financial psychotherapist and author of the new book Money On Your Mind.  

“Whatever you agree, make sure the terms are 100% clear and, ideally, put them in writing. Is it a loan or a gift? What are the expectations about the duration of this agreement, amount given, and so on? This is vital to avoid misunderstandings.” 

Reynal has further advice for parents who are thinking about helping their children financially: 

• Giving more than you can afford because you’re afraid of conflict or of damaging the relationship might end up backfiring: the relationship will suffer if you give too much and then resent, regret or suffer as a result.
• It’s fine to say no. You have freedom with your money and are under no obligation to give to an adult child. You can be thoughtful and delicate in how you do it, acknowledging how difficult it might be to hear ‘no’ from your own parents, but this isn’t a reflection of a lack of love, care or interest.
• ‘We can’t afford it’ is not the only legitimate reason to turn down a request. This might be the latest in a line of asks, or you might not want to give so much to one child if there are other siblings facing their own financial challenges.
• However, if assistance is provided in a way that prevents conflict, without either party paying too high a price and with clear terms, it could be an exchange of generosity and gratitude that can fortify your relationship with your child.