| Help for your children |
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| Written by Jonquil Lowe, 2008 | |
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First-time buyers are having a hard time getting on to the property
ladder. Jonquil Lowe looks at how mums and dads can give a helping hand.Getting on to the housing ladder is tough. Even with a downturn in house prices, young people are still paying an average £160,000 for their first home and £260,000 in the expensive South-East. Because of the credit squeeze, many lenders have withdrawn 100 per cent mortgage deals and are looking more closely at past credit history and borrowers' ability to afford repayments. Figures from Halifax show the average first-time buyer now puts down a fifth of the property price as a deposit - almost double the amount 20 years ago. Stamp duty on purchases over £125,000 and other buying costs add to the pain. Without help, many young people have to rent or delay leaving home. But increasingly parents are stepping in. According to research from Alliance & Leicester, four out of ten parents either have helped or plan to help their offspring buy a home, donating on average £21,314 per child. More than a third of parents say they would feel guilty if they didn't help. Giving cash is not the only option: there are a variety of ways you can help, each with different risk and tax implications. Ways to help your offspring on to the housing ladder.Live at home rent-free Many parents are happy to let children move back into the family home while they use what they save in rent to build up a deposit. For example, saving £600 a month at 4.8 per cent after tax would grow to £15,000 after two years. Savers can boost the return further by putting up to £3,600 a year into a tax-free cash individual savings account.Cash gift or loan Giving cash towards the deposit is the most straightforward way to help. It reduces the amount your child needs to borrow, which not only cuts their repayments but often means they qualify for a better interest rate too. Your child, not you, owns the home and, provided you survive seven years, the gift falls out of your estate for inheritance tax purposes.A drawback is if your child is married and the relationship breaks down. Their ex-partner may be entitled to a share of the home, including the part paid for with your gift. A loan is more complicated. If repayment is important, you may want to draw up a formal agreement setting out whether interest is due and when you'll get the money back. But, if you do that, the mortgage lender will take the loan into account when deciding how much your son or daughter can afford in mortgage repayments and is likely to lend them less. If the loan is informal with no set term, the lender may ask you to confirm that in writing. Where you don't have existing savings to give or lend, but you own your own home and have seen your equity grow, you could consider borrowing extra against your home to raise cash. This could either be through a remortgage or a top-up loan. Act as guarantor Acting as guarantor means the amount your child can borrow is based on your income as well as theirs. You agree to take over the repayments if your child cannot manage them.Usually the guarantee is indefinite but you might be able to cancel the guarantee once your child can prove they have enough income of their own to manage the mortgage independently. Typically, the lender will require you to get (and pay for) a signed statement from a lawyer saying that you understand the financial implications of the commitment. Some lenders insist you have enough income to cover the whole mortgage but, with others, the bulk of the mortgage (say 75 per cent) can be based on your child's income with you acting as guarantor just for a top-up (in this case 25 per cent). If you subsequently want to take out a mortgage yourself, the amount for which you are guarantor will be treated as an existing debt and so reduce the maximum you can borrow. As guarantor, your name appears on the mortgage deed, but you do not own the home so there are no capital gains tax (CGT) or inheritance tax complications to worry about. How acting as guarantor could help Bristol & West offer a guarantor mortgage called First Start. Under the terms of this loan, the maximum your child can borrow is 4.5 times your income less your own mortgage payments and other credit repayments, if any, plus once your child's income.For example, if your income less debt repayments is £20,000 and your child's income is £15,000, the maximum they can borrow is (4.5 x £20,000) + £15,000 = £105,000. |
