Publication date: 1 August 2024
Reading time: Three minutes
Although house prices have actually fallen slightly in recent times, the average UK home cost £282,000 as at January 2024 Opens in a new window. and a deposit of 10% to secure a mortgage on that property would be well over £25,000.
Buyers may have a partial deposit saved, maybe in a Lifetime or Help to Buy ISA, but still need extra cash to meet the lender’s deposit criteria. Some may even need the whole amount.
Anna Taylor, District Certified Mortgage Adviser at Handelsbanken, answers typical questions customers ask about helping their family get on the housing ladder.
The most obvious course of action is to give your child a lump sum as a deposit, but you must be careful. For starters you need to be clear about whether it actually is a gift and not a loan (see below).
If it’s genuinely a gift, it’s a very good idea to specify that in writing. It will make your wishes clearer to your executors in the event of your death.
If they’re buying with their partner or friends, you may want to make it clear that your gift is only to your child. You can ask your solicitor for a deed of trust to ask that if the property is later sold and the proceeds shared out, your child will get your entire gift back.
This may depend on the ownership structure that they’ve agreed with the other purchasers so, to be absolutely sure, take legal advice.
Although they’re not legally binding, co-habitation agreements for live-in partners and prenuptial agreements for spouses may also help with this potential hurdle.
The second issue concerns inheritance tax.
You can personally gift up to £3,000 every year with no future inheritance tax implications. You can also ‘roll over’ last year’s allowance (for one financial year only) if you didn’t use it, and this applies to anyone else contributing to the deposit.
If you make regular gifts to your child, it also lowers the total value of your estate and its potential tax liability further down the line.
It could be while that you’re able to help them in the short term, you’ll need the money back at some point (for your own retirement, for example). Or another reason, like a simple point of principle if you don’t want to hand over such a substantial sum.
Bear in mind that your child’s mortgage lender may take your child’s repayments to you into account when assessing affordability. This may affect their ability to borrow, leaving them with less overall (and possibly at a higher interest rate) as a result.
You may decide to ‘forgive’ the loan after a while (cancel whatever remaining debt your child owes). If you do, the seven-year clock for inheritance tax liability (as explained at the link below) starts ticking from that moment.
Inheritance tax will be charged on anything you gifted above this allowance. See the government’s guidance on inheritance tax and taper relief here Opens in a new window.
Be sure to seek sound tax advice and/or independent financial advice.
The idea here is that, with you as an extra borrower, you and the child combined can borrow more, or are more likely to be approved for the amount they already had in mind.
You’ll be a non-owner borrower so your name won’t appear on the deeds.
This may also have stamp duty implications if you’re already a homeowner yourself.
It doesn’t matter who contributes what percentage of the mortgage – that’s between you and the child.
When your child can afford the mortgage on their own, you may want to have your name taken off the mortgage. This would usually be the next time it’s up for renewal, for example at the end of a fixed-rate period.
Because you’re a party to the mortgage, the usual affordability assessments apply.
Should the repayments (if you’re on the mortgage until it matures) take you past your retirement age this will play a part in the credit decision.
A guarantor acts as a safety net in the event that the child can’t make the repayments. Here at Handelsbanken this eventuality is rare because, if the child can make the full repayments, they’ll probably be eligible for a mortgage of their own without the need for a guarantor at all.
If you’re a party to the mortgage, you can use any savings you have in your own name only to offset the interest on the mortgage.
We often see this with young adults moving into their own home, with parental help, instead of opting for dedicated student accommodation. The government’s Rent a Room scheme Opens in a new window lets them make up to £7,500 a year, tax free, from letting out space in their own home, as long as they live there.
We must be satisfied that they’ll be able to make the repayments without the income from their friends’ rent. The house must primarily be their home and not intended as a buy-to-let property.
If you have young children or grandchildren, you may want to give them a head start with their deposit. You can pay up to £9,000 (as at the 2024/25 financial year) every year into a Junior ISA (read our guide to ISAs) for them, meaning that by the time they turn 18 they will already have a decent amount of money saved (and by that stage the adult limit, currently much higher at £20,000, applies and either you or they can start paying in much more). Add in compound interest on the balance, and the fact that they’ll probably keep paying into it for at least another decade after you hand it over to them, and there’s the potential for substantial sums.
If you want to help a family member with a mortgage, contact your branch to talk through your options. Not already a customer?