As younger people struggle to get on the property ladder, parents and grandparents are increasingly giving them a hand up.
The Bank of Mum and Dad – and increasingly, Grandpa and Grandma – is helping out with deposits, loans, guarantees or even buying a property in joint names.
Others are buying a property themselves, and renting it out. All these options have different benefits, but also pitfalls.
If you want to help your loved ones by a home, or have somewhere affordable to live, you have to examine all your choices carefully, to work out which is right for you, and avoid making an error that you might regret later.
Helping family onto the property ladder:
Gifting a deposit
Loaning a deposit
Act as guarantor
Renting to family members
Gifting a deposit
Perhaps the simplest thing to do is give your children or grandchildren money towards a deposit on their first home.
This boosts their borrowing power, and armed with a bigger deposit, they can get a cheaper mortgage at a lower loan-to-value, too.
Be warned, your gift could become liable to inheritance tax (IHT) at some later point. You can give up to £3,000 a year with immediate IHT exemption, which couples can double to £6,000, but anything above that is known as a potentially-exempt transfer.
This means it only becomes entirely free of IHT if you live for another seven years, although it does reduce on a sliding scale in that time.
Another concern is that you gift money to a beloved child or grandchild and their partner, who later go their separate ways, as the money could end going to their ex.
You can get round this by writing a declaration of trust, which sets out who the money was gifted to, and who should retain it following a break up. If they get married or have children, you can adjust this if you wish.
In some cases, the mortgage lender may want written confirmation that the money is an outright gift, and does not need to be repaid.
Loaning a deposit
Another option is to lend the money they need, rather than making an outright gift. This way you will get the money back, at some point.
Again, you need to tread carefully, by drawing up a loan agreement setting out how much interest – if any – you will charge, and when the money should be paid back.
This should include important details such as what happens if you or the recipient dies, or you go into care, or need the money back in a financial emergency.
When applying for a mortgage, lenders will ask for a declaration of where the funds for a deposit come from.
Many will not accept a loan, insisting that the deposit needs to come from a non-repayable source such as savings or a gift. Others will accept it, but loan repayments must then be factored into mortgage affordability calculations, reducing the amount you can borrow.
A mortgage broker can help you find the most helpful lender.
If you do not have ready savings but are a homeowner, you could borrow money against the spare equity in your property, say, through an offset mortgage, and either gift or lend it to your children or grandchildren.
Given today's low mortgage rates, this is an affordable way to raise funds, but remember you will still have to service your extra mortgage borrowings. If you cannot keep up with the higher repayments, and default on the loan, your own home could be at risk.
Act as a guarantor
A number of lenders now offer guarantor mortgages, which allow younger borrowers to get a cheaper loan, because an older family member or friend will guarantee to keep up mortgage repayments if they cannot.
This does mean that you will have to step into the breach, if they run into financial difficulties. So make sure you can afford that, because your property will security.
Some guarantor mortgages automatically remove you from the agreement, after a pre-set period such as three years, or if the child shows they can manage the debt on their own.
The final option is to buy the property together. This has several attractions, as your combined incomes could allow you to borrow more money, and because you have a stake in the property, you have more say over what happens to it.
As ever, there are downsides to multi-generational property purchases. One is that you cannot claim first-time buyer stamp duty relief on properties up to £300,000, which could have saved you up to £5,000.
You may even have to pay a stamp duty surcharge of 3 per cent charged on buy-to-lets, second properties or holiday homes.
When the property is sold, you could also face a capital gains tax bill on any profit.
You may be able to get round this by taking out a joint mortgage, but leaving the property solely in your child's name, so you do not appear on the title deeds. However, you then have fewer ownership rights.
Those who cannot get help from family or friends, should consider other schemes aimed at first-time buyers, such as the Government-backed help to buy equity loan scheme, or shared ownership.
First-time buyers may benefit from discounts of up to £100,000 under the First Homes scheme, proposed by the government in March 2020. Keep up with developments.
Renting to family members
Alternatively, you could buy a property in your name, and rent it out to your child or grandchild, at a reasonable rate.
This will ensure your children have a landlord they can trust, while you generate extra income from a reliable tenant. Better still, all the money stays in the family.
There is nothing to stop you renting a property to family members, although some mortgage lenders see this as higher risk than a standard buy-to-let, as the owner is likely to be more lenient about late rent, and so on.
Since it will be your second house, the purchase price will be subject to a 3% stamp duty land tax surcharge.
You will need also to pay income tax on the rent you receive, as you would if you were renting to a third party. Likewise, the property must comply with health and safety regulations, which have become more stringent lately.
Since the property is not your principal private residence, if you sold it, it could be liable to capital gains tax.
If your son and his partner were to split up, the partner could obtain rights to remain in the property, particularly if she had custody of the children.
There are some restrictions around benefits payable to people who live in a property owned by a relative – a point worth considering if this is likely to applies in your case.
Finally, you should also consider what would happen in extreme circumstances – for example, if you died or were declared bankrupt.
The danger is that any disputes over the terms of the rental could spill out into a process.
Consult a solicitor and take professional advice before proceeding.
Renting to family checklist
You should consider putting your family rental on a more professional basis.
- Consider a formal rental agreement.
- Request a deposit for breakages or late rent.
- Consider landlord insurance. This will cover any damage to the building or its contents, as well as the tenant if injured in the property, and legal disputes or unpaid rent.
- Ensure the property is safe. Carry out annual gas safety checks, make sure electrical appliances are safe, and install smoke alarms on every floor.
- Provide your tenant without Energy Performance Certificate.
- Where appropriate, comply with House in Multiple Occupation rules, if three or more tenants make up more than one household, but with shared bathroom and kitchen facilities.
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