How to get on the property ladder with parental help
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Getting on the property ladder can be a daunting and seemingly impossible task for a lot of young people. House prices are higher than ever, with the average cost rising from £155,417 in February 2009 to £228,147 in January 2019. Not to mention increases in rent costs means it’s difficult to save for a deposit in the first place. It’s no surprise more and more parents are choosing to help their children buy their first property.
According to statistics published on the Independent website, almost three in five homebuyers under the age of 35 receive financial help from their parents. But it’s not just the millennial generation: one in five 45-to-55-year-olds also receive parental help, and so do 8% of the over-55s demographic.
Here’s what you need to know about before you can get on the property ladder with parental help.
You’ll need to pay a percentage of a property’s value in order to get a mortgage. Which suggests an absolute minimum of 5%, which means you’d need to borrow the remaining 95%.
However, the bigger your deposit, the less money you need to pay back. There will also be a greater range of mortgages available for you to apply for, since you will be viewed as less of a risk.
You also need to take repayments into account. A smaller initial deposit results in a larger loan, which in turn results in larger monthly repayments and higher interest rates. It is less expensive to save up for a big deposit in the long run.
- Decide what percentage deposit you’re going to aim for (e.g. 20%).
- Find out what the average property prices are in the area you want to move to. Make sure you take the size of the property you want to buy into account, e.g. a two-bedroom house.
- Work out what amount your deposit would be by multiplying the average house price by 1% of your deposit percentage. If you were looking to buy a house that cost £250,000 with a deposit of 20%, your calculation would be £250,000 x 0.2 = £50,000.
- It’s worth trying different calculations until you find an amount you think is achievable.
You can also try using mortgage deposit calculators online.
Remember: As The Money Advice Service points out, you only get access to better deals by increasing your deposit in 5% increments. A 20% deposit is better than a 15% deposit; a 17% deposit is not.
An easy way for parents to help their children get on the property ladder is a gifted deposit. This can form the whole amount, or be added to your existing savings to boost the percentage you can pay.
A gifted deposit is different to a loan, since it does not have to be repaid. Parents may have to sign a declaration confirming there is no obligation to return the money before mortgage lenders will accept it. They may also have to state that they don’t (and won’t) have any interest in the property itself.
Note: There could be tax implications for a gifted deposit. You might need to pay inheritance tax if your gift was made in seven years before a parent’s death.
There’s no limit on the amount of money parents can gift to their children each year. HM Revenue and Customs (HMRC) does not count cash gifts as income, which means they aren’t liable for income tax.
Payments aren’t subject to additional tax if parents are still working and gift their child money from their income. They should be able to prove these gifts come from their income, not their savings, and their standard of living shouldn’t be affected.
It’s worth bearing in mind the kind of benefits you can receive depends on how much money you have in savings. These are known as means-tested benefits.
The main means-tested benefits are:
- Income-based Jobseekers Allowance
- Income-related Employment and Support Allowance
- Housing Benefit
- Income Support
- Pension Credit
- Universal Credit
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Another option is borrowing money for all or part of the deposit from your parents. It’ll cost less than taking out a loan elsewhere, since you might not have to pay interest, but mortgage lenders will still view it in the same way they would any other loan. Some may not accept your application if you need a loan to fund your deposit.
Even if it is accepted, loan repayments will be factored into your monthly outgoings when lenders assess your affordability, income, and spending. They will be willing to lend you less if you have outstanding debt, so pay off as much as you can before you start your application.
It’s worth considering going through a solicitor to draw up a loan agreement. This means you and your parents will both be aware of where you stand.
0% deposit mortgages are rare these days, but they do exist, and are often known as parent guarantor mortgages. Parents (or grandparents) act as guarantors by keeping a percentage of the purchase price – normally the same amount as the deposit – in a separate savings account. They can also use their own property to cover this.
It’s a big risk to take out a mortgage like this, especially for parents. The guarantor must make the payments if the homebuyer is unable to, which can cause a lot of problems if their financial position changes once the deposit has been paid.
Getting a mortgage with a parent might not be an option you’ve thought of. But it’s something to look into – your parents’ earnings are also taken into account when mortgage lenders assess your affordability, which could mean you’re able to buy a larger, more expensive house.
| Are your parents still working? | Generally, a joint mortgage will only be available if your parents’ income is from work, rather than a pension. |
| How old are your parents? | Some mortgage lenders will decline a joint mortgage application if your parents are over a certain age. This will vary between lenders. |
| Do your parents still have a mortgage of their own? | If they do, they’ll have to make payments towards two mortgages, which could cause financial problems in the long-term. |
| Can your parents afford the extra payments? | If they’re making payments towards a second home, they may be liable to pay capital gains tax (CGT) on the profits of your house if you sell it later. They might also have to pay an extra 3% in stamp duty. |
| How will it affect your credit scores? | Your name is linked with anyone you share financial responsibilities with – including a joint mortgagor. If any of you have financial difficulties, it’ll affect the others’ ability to get credit. |
You could also look at taking out an offset mortgage. Offset mortgages are a way of reducing the amount of interest you pay on your mortgage (although you won’t earn any interest on your savings either).
To set up a family offset mortgage, your parents would put a significant amount of savings into an account that’s linked to your mortgage. The more savings in the account, the less interest you’d pay. However, offset mortgages normally have higher fees and interest rates to begin with. You may also need a minimum deposit of 25%.
Finding a house that you can afford and are happy to buy can be difficult – it’s a big commitment. Some people decide they’d rather buy a plot of land and build their own home instead. It’s important to buy land that has planning permission, or at the very least be certain you can obtain planning permission in future. You won’t be accepted for a mortgage without it.
You’ll need a different mortgage if you build a property, known as a self-build mortgage. The agreed amount of money is released in stages as the build progresses, and each finished stage is assessed by a valuer.
You need to be prepared to stick to a strict budget if you’re going to build your own home. Costs can add up quickly and you may have to pay unexpected bills. You may also still have rent to pay while your house is being finished.
There will be tax implications if your parents pass assets like money, property, and other valuable items on to you.
They can give away £3000-worth of gifts tax-free each tax year (which normally runs from the beginning of April until the beginning of April the following year. For example, the tax year 2018 started on 6th April 2018 and finished on 5th April 2019).
The first £325,000 of a parent’s estate can be passed to their children tax-free. This increases to £425,000 if they leave their main home to their children. (This includes adopted, foster, or step children.)
It’s natural to want to help your children get on the property ladder. But as a parent, you need to think about what you can afford, too. There are a lot of options to consider. Always get expert advice before you commit.