A win-win scenario: The clever way to help your children onto the property ladder
Theyve been dubbed "generation rent because of the struggles they face getting onto the property ladder.
Previous generations may have seemed to have it easy, trotting up the property ladder with their first home at an average age of 23, before buying a second property once their family expanded.
Now, prospective buyers dont expect to buy a home until they reach 35. So, just what is the best way for parents to help their grown-up children buy their first house?
One way which is increasing in popularity offers benefits for both parents and children alike.
Parents remortgage their own property to raise a sum of money which is then put into a trust for a child to draw from.
The borrowing reduces the liability on a parents estate, potentially reducing the amount of inheritance tax (IHT) which needs to be paid in future. The child is then able to use cash drawn down from the trust. This can help them put together a deposit years earlier than they would otherwise have done so or show an extra income, meaning they can get onto that first rung of the ladder much quicker.
Its just one way that the Bank of Mum and Dad is coming into play for children priced out of the market because of a combination of tighter mortgage rules following the credit crunch and the need for higher deposits.
Specialist mortgages are also available to offer some alternatives. Family springboard mortgages usually allow children to buy a property with a 5% deposit provided that parents have a certain savings account with a provider.
Parents will usually have to open a saver account which has cash worth around 10% of the purchase price with the provider. The saver will get their savings back with interest provided that the buyer keeps up repayments. So, while the savings rate may not be the best on the market, it could be worth accepting a bit less to help your offspring buy a home.
Other options include using a parents property as collateral or taking out a traditional guarantor mortgage, although these are becoming thinner on the ground.
If both generations are able to work out a plan for repayments, there is also the option of taking out a joint mortgage where all incomes will be taken into account to decide how much can be borrowed.
If you go for this option then its vital to take into account any tax implications. Parents will need to consider that Capital Gains Tax (CGT) could be an issue, although planning can be done to mitigate this. A good idea could be to structure ownership as "tenants in common with the ownership perhaps weighted in favour of the child.
Buyers must bear in mind that any third party contributions will need to be reported to the lender. It is likely that any true gifts will not cause an issue, but if trusts are loaning funds, it could be that securing a mortgage is more difficult.
While it may at first seem impossible to help your children onto the property ladder while still keeping control of your own finances, there are options out there. You simply need to seek advice and weigh up the best one for you and your family.
Martin Williamson is Head of Residential Property at Latimer Hinks Solicitors in Darlington. Latimer Hinks has a team of around 40 people serving private and corporate clients. For further information: www.latimerhinks.co.uk or call 01325 341500.
Please note: This article is intended as guidance only and does not constitute advice, financial or otherwise.
For further information please contact Martin William