Tony Byrne’s View 10 September 2017
I was recently asked by a couple of young early career people how they could get onto the property ladder by buying their first homes. Now we do not advise on mortgages but we are experienced in advising parents and grandparents on ways to help their children and grandchildren to buy their first properties.
Parents are forecast to lend £6.5 billion to their children to buy properties this year. That means that parents will be involved in 25% of property purchases in 2017. It will also make the Bank of Mum and Dad a top ten mortgage lender this year. Quite remarkable, eh?
Well there exists a myriad of ways in which you can help your children or grandchildren to get their feet on the property ladder. These are some ideas.
- Gift the deposit to them in full or in part.
- Lend the deposit to them.
- Buy the property for them in their names if you can afford it.
- Release equity from your home to fund the deposit.
- Buy the property jointly with them.
- Personally guarantee their mortgage payments.
These are just a few ideas but the list is endless.
Are there risks involved in some or all of these options? Yes there are risks but in reality the risks are likely to be few and far between. Why is this?
Well the fact remains that there is a shortage of properties in the UK and this shortage is likely to continue for many years to come. It’s the first and most basic lesson you learn in an economics class. When demand exceeds supply the price rises. Therefore it is highly likely that both house prices and rentals will continue to rise for the foreseeable future. This is good news for buyers as their equity in their properties will probably increase and the likelihood is that their void periods on their tenancies will be minimal.
Let’s look at one of these risks; personally guaranteeing a mortgage. You do this for your son who buys a property and lets out 2 of the rooms living in one of them himself. He loses his job and can’t keep up the mortgage repayments. He moves back into your house, he lets out his spare room and the mortgage continues to be paid by the 3 remaining tenants. This is a not unlikely scenario.
Do be aware that gifting your money to children to buy property is a gift for Inheritance Tax purposes so if you die within 7 years of the gift a proportion of that money will remain part of your estate for IHT purposes: 100% if you die within 3 years of it!
The biggest risk of all is gifting/lending money or personally guaranteeing a mortgage to a son or a daughter who is poor with money for whatever reason. So do be careful about who you decide to help.
If you are unable to help your children they can still save their own money for a house deposit. They could of course borrow money privately from friends, acquaintances or other family relatives too. They could even take advantage of the government’s Help To Buy Scheme to buy a new build property.
If they are saving to buy their first home they can even save money into a Help to Buy: ISA and the Government will boost their savings by 25%. So, for every £200 they save, they receive a government bonus of £50. The maximum government bonus they can receive is £3,000.
It is considered difficult to buy a first home these days but I remember it being really difficult to buy in the early seventies when we had mortgage queues and delays of months or years before you were allowed to buy a first property. I also remember base rates of 17% in the late seventies compared to 0.25% today! My mortgage interest rate was 15.4% at one stage! So it’s simply not true that it is harder than ever to buy a first home. It has always been difficult.
It can be done. Young people can still buy property. It’s just a question of doing proper research, saving the money, and parents or others helping children to fund that first property purchase if they can.