Parents and grandparents are increasingly being called on to step in to help younger family members buy their first home.
According to research last year, single first-time buyers now need to save for an average of 13 years to have enough for a deposit, compared with just a year’s worth of savings back in the 1990s.
Londoners must wait even longer, and even though wages tend to be higher in the capital, property prices are proportionally still much higher, meaning they must save for aalmost 46 years before they can buy their first home.
Nowadays around 60% of first-time buyers get help from parents to buy their first home – and it can make a lot of sense for everyone concerned.
What you need to know before signing property over to your children.
Buy a house for your children to live in
Parents with money to spare can always buy a second home and allow their children to live in it, or they could become joint owners of a house or flat with their children.
But the aim of many older people is to see their children become financially independent and they would prefer them to take responsibility for their own accommodation – perhaps with a little financial assistance – rather than having an on-going involvement.
Give your child the money to buy a house
The obvious thing to do – albeit not necessarily the most desirable or even possible – is simply give the child as much money as possible.
Even if the child can theoretically meet a mortgage lender’s increasingly stringent requirements since the Mortgage Market Review came to fruition, the larger the deposit that the would-be housebuyer can put down, the better the mortgage rate that he or she will be offered.
If the child’s house purchase coincides with parents or grandparents downsizing from the family home to somewhere smaller, the older generation can pass excess wealth over and above what they need to live on in retirement to younger family members, with less risk of tax than if they waited to leave the cash as an inheritance.
As long as the donor lives seven years after making a gift, there will be no inheritance tax on the gift – no matter how big the donor’s estate, and no matter how much money has been transferred.
Of course, not many retirees are in the fortunate position of having so much spare cash that they can afford to give it away, so they may be tempted to use their assets to benefit their younger relatives in other ways.
This can be a good idea, too, but older family members need to be sure they are not putting their own security and retirement comfort at risk.
There are several ways that parents can use their assets to help their child buy a house, without actually parting with those assets.
Read about the rules on inheritance tax.
Mortgage your own home
If parents or grandparents have a large amount of equity in their home, or own it outright, it may be possible to mortgage it and give the money released to the first-time buyers.
There will be restrictions on older people getting an ordinary mortgage, particularly if they are no longer in employment.
However, there are a couple of specialist lenders who will lend on an interest-only basis to older borrowers.
There may also be the option of equity release (where you borrow money against the value of your home but it does not have to be paid back during your lifetime).
You will need to do the sums carefully because the interest rates you could end up paying to achieve this type of manoeuvre are likely to be considerably higher than a high street mortgage, and there will be arrangement fees to take into account as well.
It's not something to be undertaken without specialist advice but, as with a straight gift of money, could be used as an inheritance planning move, which could make it more worthwhile.
Find out more about applying for a mortgage when you are over 50,
Guarantee the first-time buyer’s loan
The homebuyers may be able to borrow more than they normally would be allowed to if a family member “guarantees” the loan.
There are several ways of doing this. These include having parental income taken into account when the amount that can be borrowed is assessed, allowing a charge to be placed on your property or depositing cash with the bank in a savings account as security.
All have their benefits and drawbacks, and you need to be clear in your mind about how you could be affected if things go wrong.
Guarantee vs shared ownership
The main advantage of providing a guarantee rather than opting for shared ownership is that the property and the loan are at all times in the name of the young buyer.
There are, therefore, no concerns about remortgaging at a later date or capital gains tax worries for the parent on eventual sale, as there would be if you were a joint buyer and did not live in the property.
After a certain period, or when the young person’s income increases, or they have managed to reduce some of the capital outstanding, you will be released from the guarantee.
A guarantee loan could be particularly suitable where the buyer can “afford” higher mortgage payments, perhaps from employment bonus payments. However, the lender will only lend a lower amount because these bonuses are not a guaranteed part of the borrower’s salary.
However, the fact that you don’t have a stake in the property could also be a disadvantage if the borrower defaults – for instance if the child’s salary bonuses dry up and you are called on to make up the difference.
You need to be absolutely clear about how much you are guaranteeing and what the risks are.
With some guarantee loans the guarantee is for the entire amount borrowed, even if the borrower only needs a modest top-up above the income level up to which the lender will normally lend.
With other lenders you just guarantee the surplus. Be particularly careful if your own home could be put at risk.
Find out more about the dangers of guaranteeing lending.
A guarantor mortgage using parental income
This type of loan may be suitable if the parents are still earning and have a small mortgage, or no mortgage, themselves. Their income is used to boost the borrowing capacity of the homebuyer.
A first-time buyer earning £30,000 income could usually borrow up to about £120,000. If their parent earning £45,000 stood as guarantor, this figure could be boosted to £180,000.
The child pays the mortgage (unless the parent wishes to contribute voluntarily, of course) and none of the parent’s money changes hands unless the child defaults, when the parent will be asked to step in and make the payments.
A mortgage guaranteed via a charge on the parental home
Under this scheme the borrower can access a loan of 100% of the value of the property being purchased. This too involves no parental money changing hands, but a charge is made against the parental home.
So, if the borrower defaults on payments, the lender can recover the money, in the worst case by forcing a sale of the parent’s house to pay the child’s debts.
If you are considering one of these loans, be sure that the amount of guarantee is capped. This means the guarantor’s liability cannot exceed the original agreed amount.
A mortgage guaranteed with a savings account deposit
Under this scheme the borrower can access as much as 95% of the value of the property being purchased as long as the guarantors – the parents or other relatives –– deposit a sum of money in a savings account with the bank.
Interest is paid on the savings to the parent, whose money it remains, but the cash in the savings account could be forfeit in the event of a default by the borrower.
Family offset mortgage
This type of loan does not necessarily allow the child to borrow more at the outset under income multiple rules. But interest on savings placed in an account parallel with the mortgage reduces the amount of interest due on the loan.
It can also reduce monthly payments, or shorten the lending term, thereby making repayment easier for the child.
The capital in the savings account belongs to the depositor at all times - and only the interest is used to assist the child.
* Read Annie Shaw's money articles every month in Saga Magazine.
* This article first appeared in January 2013, and has since been updated.
Learn more about Saga's equity release service.