How can parents help their children get on the property ladder?
Nearly a quarter of home purchases this year will be backed by the “bank of mum and dad” – up from fewer than one in five in 2019.
Financial help provided by the bank of mum and dad (parents, grandparents, other family and friends) will be a driving force behind the recovery of Britain’s housing market. Those able to assist will lend an average of £20,000 towards a deposit on a home, according to research from Legal & General (L&G) and economics consultancy Cebr.
If you’re a parent thinking of helping, or a prospective first time buyer trying to think of the right way to ask for help then read on, as we’ve summarised the different ways in which the bank of mum and dad might be able to help…
Gift a lump sum
If you’re fortunate enough to have a lump sum you can offer as a gift to your child(ren) then great. A deposit of 15% or more will help them access competitive mortgage products and could make the difference between buying being possible and impossible. Worth noting however, that a larger deposit in itself won’t make a big difference to how much they can borrow, which is assessed on an affordability basis.
Offer up existing savings as security
Similar to above, but some lenders offer a solution where you can ‘park’ your savings in an interest-bearing savings account for 5 years. If you can park 10% of the purchase price of your child’s property in this way then they may be able to borrow up to 100% of the purchase price. At the end of the 5 years you get your money back, with interest. The only risk to your savings is if your child defaults on their mortgage as in that case your savings may be at risk. Assuming they pay their mortgage on time for 5 years you’re then free to take your savings back, or perhaps use the same scheme again for another child.
Offer up your property as security
Similar to above but instead of parking savings with a lender for 5 years, you offer to allow a charge be placed on your property for a period of time. Again, you’re only at risk if your child defaults on their mortgage payments but do think carefully because in the absolute worst case scenario both you and your child could lose the roof over your head!
Raise a mortgage or take equity release
You might want to consider releasing money currently locked away in your property by raising a mortgage against it. Traditional mortgages might be possible if you have a strong pension income, or are sufficiently far from retirement that you could raise and repay a mortgage using earned income between now and retiring. Otherwise for older parents (60+) or perhaps even grandparents, equity release can be worth considering. Gone are the days of sky-high interest rates and inflexible lending terms – today equity release mortgages start from around 2.5% with a wealth of flexible options in terms of interest servicing, the ability to make overpayments, and the option to specify a drawdown facility for potential future needs.
Joint Borrower Sole Proprietor (JBSP)
It’s a bit of a mouthful, but the modern incarnation of what we might have called a Guarantor mortgage in the past has evolved to meet modern regulatory standards. Put simply, this involves 2 (or sometimes up to 4) parties to the mortgage, but only 1 or 2 owning the property. Typically it’s a parent helping an adult child, or their child and partner, but more tenuous relationships between buyer and ‘helper’ aren’t uncommon such as siblings, auntie/uncle or even friends and work colleagues (think carefully though!) The mortgage is based on the combined affordability of all parties, so it can’t usually extend beyond the oldest borrower’s expected retirement age, unless a solid pension income is being factored in. This often prevents parents aged 50+ from helping their first time buyer children who might want a term of 25+ years, but it can work in certain circumstances, especially if the prospective buyer is in a career with a recognised clear path of progression based on experience/qualifications etc.
In Summary, whilst it’s a tough world out there for first time buyers, there’s plenty of creativity in product design and even if you’ve been turned down elsewhere there might still be a solution if you know where to look. Our friendly team of fully qualified, experienced advisers would be more than happy to help you work out what’s possible for you and/or your grown-up children. Get in touch or complete our enquiry form to get the ball rolling.
Sam Murphy, Managing Director