Getting on the property ladder
Thousands of first time buyers are turning to the ‘bank of mum and dad’ this year to help get a foot on the property ladder – as well as older children who have long since flown the nest.
In doing so, parents can improve their child’s credit rating by acting as a guarantor or providing a deposit - this helps get a better mortgage rate. These options are different from giving a financial gift of money, which may have a tax implication.
If parents go down the route of offering to deposit a lump sum with a mortgage lender, as a form of financial guarantee, this will have the least tax implications because the funds are only there to act as security. It is the same if parents offer their own property as security.
If you’re keen to help your children but are still wondering how, you might consider the following:
Guarantor mortgages: Where a parent or close family member guarantees the mortgage debt. This means that if the buyer misses their mortgage repayments the guarantor will have to cover them.
Family offset mortgages: Where parents or grandparents put their savings into an account linked to their child’s mortgage. The money in the savings account is deducted from the mortgage, making the child’s repayments cheaper.
Family deposit mortgage: With family deposit mortgages, a family member deposits cash in a special savings account which earns interest, and the money is held as security against the mortgage. Effectively, this is a way of obtaining 100% mortgage, which is generally not available nowadays.
Flexible family mortgages: Where a parent or family member can use some of the value in their own property as security. Another option is for the family member to place savings in an offset account, which reduces the amount of the mortgage on which interest is charged.
Gifted deposits: The parent gives a deposit to their child for the purchase of property.
Joint ownership: In this case, the parent and the child are named on the mortgage but the deeds can be in the child’s name. The size of the loan is based on the earnings or assets of both parent and child and, if one of them stops paying, the other one will become liable for the debt.
One of the best ways to find the right mortgage is to seek help from a mortgage broker. They will work on their customer’s behalf and negotiate between them and the mortgage lender.
For first time buyers, or people with a poor credit history, a mortgage broker can offer advice on how to build a credit score that attracts lenders. Often it is about knowing the right lenders to approach.
As there is a risk of repossession if mortgage payments are not maintained, it is always important to make an informed choice. Your home may be repossessed if you do not keep up repayments on your mortgage.