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Help your child onto the property ladder By Hannah Ricci
Today's first-time buyers face even more of a struggle than previous generations. With average house prices exceeding £176,000 and interest rates at their highest for five years, it can feel as though home ownership is slipping According to industry research the average first-time buyer is now 33 and has saved for around five years for a deposit. In 2005 the average first-time buyer could not afford the average house in 85% of UK towns. Over a year later, the situation has only worsened. It's no surprise that parental help has never been more valuable to young adults. But working out exactly which is the best way to help your child can leave parents facing some tough choices. Helping with a deposit A lump sum is the most obvious method of helping your child buy their first home, and generous parents across the UK are raiding their life savings to help their offspring. Half of all first-time buyers are given or loaned cash - and the average handout is around £18,000. As long as this doesn't jeopardise your own financial security, this can be beneficial for all the family, says Matt Pitcher, an IFA at Towry Law. "People with children of first-time-buyer age tend to be older, so they might be mortgage-free, with spare cash in savings. Giving money to their children as a gift is a great way to help out, and it's also beneficial for inheritance tax purposes." However, parents need to be aware there are rules surrounding the taxation of gifts. While both parents can gift up to £3,000 a year to their children tax-free, anything in excess of this will be viewed as a potentially exempt transfer and will therefore only become IHT-free if the parent lives for a further seven years. If you don't want to give the money away outright there are other options. Katie Tucker, technical specialist at John Charcol, says lots of parents help out by taking an equity stake in the property in return for their contribution. Some lenders, however, will be concerned when parental deposits are given as loans, particularly if it's repayable with interest and there's a specific repayment date. So they often ask for a letter confirming the terms of the agreement and whether the parents expect to have a financial interest in the property. Buy-to-let Buying a property and letting it out to your child and their friends is becoming an increasingly popular option. "This doesn't immediately get your child onto the property ladder, but after a few years, the combined rental income from all the tenants will add up to quite a lump sum to put towards a deposit," explains Tucker. Buy-to-let won't only bring you a tidy profit; it'll also save you forking out monthly rent to line other landlord's pockets. It isn't always straightforward, however, there are tax and ownership issues to consider, warns Pitcher. "Income tax will be payable on the rental income and capital gains tax on any gain in the property's value," he says. "And if you don't get round to transferring ownership into your child's name quickly enough, the transfer will be treated like a sale and liable for capital gains tax." Joint mortgage If you're not in a position to buy a rental property or provide a lump sum, you might want to chip in with monthly mortgage payments - although this will not assist your child in actually being approved for a mortgage. "Lenders will not take this income into account, unless the parent is named on the mortgage," explains Tucker. If you want your income to be taken into account, this is classed as a joint mortgage, with both your child's and your name on the deeds, and the amount you will be lent will be based on your combined income - so if you still have a mortgage your borrowing power will be reduced. Joint mortgages are offered on the basis of 'joint and several liability'. This means that all borrowers are equally liable for repaying the whole loan. If your child stops paying their share, you're still liable to pay the whole amount. As a result, you need to be confident that your child will keep up repayments on their half or know that you could cover them if they find they can't. There are also issues to consider further down the line. "Joint buying with your child could cause stamp duty and capital gains tax issues later on if your child wants to take the mortgage over," says Katie Tucker. "They will effectively be purchasing half the property from you, which can cause complications." Going guarantor With guarantor mortgages, only your child will be named on the mortgage - you as the guarantor will not. The amount your child can borrow will be based on your income not theirs, which is why your guarantee that it can be repaid is needed. Most lenders will require guarantors to support the whole mortgage amount and will assess your income, current mortgage and other financial commitments to determine if you can afford to guarantee the mortgage. If you're mortgage-free, it's a feasible option. Some lenders require the guarantor to be liable for a portion of the mortgage. "The way this normally works is that the parent is liable for around 30% of the loan, if the child can show evidence of being able to afford the other 70%," adds Tucker. Pitcher warns parents to think carefully about taking on a guarantor mortgage. "When the amount borrowed is based on your income rather than your child's, they may be tempted to take on too big a mortgage for their salary," he says. "The last thing any parent wants, when they're mortgage-free themselves - or close to it - is to be lumbered with another huge debt if their child can't cope." There is an option that bridges the gap between joint and guarantor mortgages: the 'first start' mortgage. "The Bank of Ireland and Bristol & West offer this type of mortgage," says Tucker. "They allow the parent to be named on the mortgage, but not on the deeds, which saves on stamp duty and capital gains tax issues later on." First-time buyers aren't required to be in a particular profession, and the parents' income, after their own commitments, is added to the child's. Can you afford to help? While it's great if you are able to help your child buy their first home, your assistance should never be at the expense of your own financial security. And although many parents are willing to remortgage their own properties to raise a deposit, it's not recommended. Don't be too quick to whip out the cheque book. "Parents should be encouraging their children to save for themselves," says Francis Klonowski, partner at financial planning consultants Klonowski and Co in Leeds. If you aren't able to help, don't feel guilty.
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