How parents can help
With typical first time buyer properties being so expensive compared with earnings, many are finding it impossible to buy a first home. More and more parents are helping their children onto the property ladder so they can start paying off their own mortgage, and become more independent.
It may be that parents are still earning a good salary or have considerable equity or savings. There are ways parents can help which won’t beak the bank.
When considering how parents can help their off-spring achieve their goals it is imperative that they plan their own financial needs at the same time and make contingencies for significant changes in circumstances.
How parents help their grown up children buy their first home can vary in degrees from simply offering to match savings, paying stamp duty, paying legal fees or buying furniture and appliances to
harnessing the borrowing power of a parent’s salary or pension. Be aware that a parent’s home will be at risk if they do not keep up repayments on any loan secured against it – and this applies to any other property that they borrow money for as well. Good independent financial advice is critical, as is good legal advice and tax planning.
Helping with the deposit. A deposit is no longer mandatory when buying a property, but having at least 5% to put down will open more doors to more lenders and better deals. It also creates a buffer in the event of a negative equity position.
Possible ways of coming up with a lump sum to give to grown up children include taking out a further advance or increasing the parent’s mortgage with their existing lender, re-mortgaging by taking out a loan with another lender, using savings, equity release or taking cash out of their pension. There are two main types of equity release which can be looked into. This is something a grandparent might consider.
Giving your kids a lump sum of money. If a parent wants to make a gift of a deposit, they are entitled to but under inheritance tax laws, tapering tax may be payable in the event of their death.
Lending money. On whatever basis parents make a loan, it is best to set down a repayment schedule from the start. It can be made legally binding with a promissory note. Interest earned would form part of any income for tax purposes.
Helping with the mortgage. As the first time buyer market has become tougher and tougher for lenders, they have become more inventive with their mortgages. There are many mortgages designed specifically for parents and their children in mind. Options available which require further investigation are such as; joint
mortgages, joint ownership, guarantor mortgages, family offset mortgages, harnessing savings, mortgages that write the parent into the finance but not the ownership of the property and mortgages that use a pension income.
As well as considering the financial impact, tax and legal considerations should be taken into account.
Tax implications. The process of buying, selling, giving and renting out property is riddled with tax issues. Finding out what these are and how they work in advance could result in saving a small fortune: Examples of taxes that parents need to be aware of are: Inheritance tax including tapering relief, stamp duty, pre-owned asset tax, capital gains and tax relief on renting out a room.
Legal implications. Parents shouldn’t be afraid to model good practice – and help protect their investment - by drawing up the necessary legal contracts. Areas where parents will need legal assistance are such as; joint tenancy, wills, a co-ownership agreement, declaration of trust or trust deed.
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