Author
Buying your first home is a major life milestone but, in recent years, it has been increasingly difficult for young people to take this important first step onto the property ladder. According to figures from the Office for National Statistics, as of July 2021, the average UK house price now stands at £256,000. This is an 8% increase since the previous July, meaning that buyers now need an extra £19,000 than they did at the same time last year. If you’re struggling to afford a deposit, then you may want to ask your parents to help you. Here are three useful ways that they can do so.
1. With a financial gift or loan
One of the simplest ways that your parents can help is by offering direct financial support, so that you can more easily put down the deposit you need. This can be especially useful if you live in an area where high costs of living make it difficult for you to build up enough wealth. One of the main benefits of helping in this way is that a gift may mean that you can put down a larger mortgage deposit for the property, such as 15% rather than just 10%. This can be beneficial as typically, the larger the deposit is, the more favourable the terms of the mortgage are. This may result in the lender offering you a lower interest rate. However, before you ask your parents to help you in this way, you may want to sit down and discuss the financial implications of gifting with them. For a start, while they might be willing to help, you may want to ensure they can afford to give it as if they gift too much, it could impact their financial wellbeing. According to research from Just Group, published in Mortgage Strategy, many parents who help their children financially don’t take issues such as costs of later-life care into account. Furthermore, it’s important to be aware of the tax implications of making a gift. If the parents pass away within seven years of making the gift, there could be Inheritance Tax liabilities to consider. Alternatively, if gifting isn’t the right solution for your circumstances, another option is for your parents to loan you the money instead, which you can then repay in regular instalments. If you do this, then you may want to formalise the loan by putting it in writing. This can help to reduce the chance of any disagreements or misunderstandings on issues such as the length of the repayment period or how much interest they are charging you, if any. Having documentation can also help if there are ever any potential Inheritance Tax issues in the future. Finally, if you’re buying with a partner, your formal agreement can set out guidelines for how the property, as well as any money from your parents, should be split if you decide to separate.
2. By taking out a joint mortgage with you
If your parents want to help you financially, another option is for them to help you with a joint mortgage. The primary benefit of this is that it can make you more likely to meet your lender’s affordability checks, as a joint mortgage allows you to include your parents’ income along with yours. This usually means that you may be able to access a greater range of mortgage deals or secure a larger loan. However, one important thing to bear in mind is that if your parents are signing the mortgage with you, their names will also be on it. This means that if they already own a home, there may be tax implications, such as having to pay additional Stamp Duty. One potential way you can avoid this is by using a “joint borrower, sole proprietor” mortgage agreement. With this, there are two key differences to a normal joint mortgage – only your name will be on the mortgage and the lender will only take the top two incomes into account. This way, your parents can still help you to satisfy affordability checks, but they won’t need to pay any additional Stamp Duty. Please bear in mind, however, that there is a financial risk to your parents if you’re unable to keep up with your repayments.
3. Acting as a guarantor for your mortgage
A third option is to ask your parents to act as the guarantor for your mortgage. What this essentially means is that they promise to make mortgage payments on your behalf if you’re unable to. However, this may involve them offering some of their savings, or even their home, as security. The main benefit of doing so is that you could potentially borrow up to 100% of the value of the property you want to buy. This can be useful if you have poor credit history or are struggling to afford a deposit. Of course, the obvious issue with this is that your parents would be liable for the repayments if you can’t keep up with them, which could affect their financial wellbeing. In a worst-case scenario, they could even lose their home if they decided to use it as security against the mortgage. If you’re unsure which is the best way for your parents to help you get onto the property ladder, you may benefit from seeking professional advice. Working with a mortgage broker can help you to weigh up the pros and cons of each option and work out which is the right one for you.
Get in touch
If you’re hoping to get onto the property ladder with the help of your parents but aren’t sure which method could help you the most, get in touch. Email us at office@verve-financial.com or call 0330 320 5048.
Please note
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it. Think carefully before securing other debts against your home.
