Giving your grown-up children a helping hand onto the property ladder.               September 2006

Giving Your Grown-up Children a Helping Hand onto the Property Ladder
by Helen Adams, Managing Director, FirstRungNow Ltd.
 

Typical first-time-buyer properties are expensive compared with earnings, and many young people are finding it impossible to buy a first home. So more and more parents are helping their children onto the property ladder. This way, young people can start paying off their own mortgage and become more independent.

It may be that you, the parents, are still earning a good salary or you have considerable equity or savings. There are ways you can help which won’t break the bank.

Firstly, you have to plan your own financial needs and make contingencies for any significant changes in circumstances. Good independent financial advice is critical, as is good legal advice and tax planning.

How you help your child buy their first home can vary. The options include:

• offering to match savings
• paying stamp duty
• paying legal fees
• buying furniture and appliances
• harnessing the borrowing power of your salary or pension in order to help with a deposit
   

If you opt for the last one, be aware that your home will be at risk if you do not keep up repayments on any loan secured against it – and this applies to any other property that you borrow money for as well.

Helping with a 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. This also creates a buffer in the event of a negative equity position.

Possible ways of coming up with a lump sum include:

• taking out a further advance or increasing your mortgage with your existing lender
• re-mortgaging by taking out a loan with another lender, using savings, equity release
• taking cash out of your pension.

There are two main types of equity release that can be explored:

• Giving your children money. If you want to make a gift of a deposit, parents are entitled to do so, but under Inheritance Tax laws, tapering tax may be payable in the event of your death.
• Lending them money. On whatever basis you 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 your 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 would require further investigation are:

• Joint mortgages
• Joint ownership
• Guarantor mortgages
• Family offset mortgages harnessing savings
• Mortgages which write the parent into the finance but not the ownership of the property
• Mortgages which use a pension income

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 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
• Tax relief on renting out a room.

Legal implications

Drawing up legal contracts is essential to protect your investment. Areas where parents will need legal assistance are joint tenancy, wills, if your child’s partner moves in, declaration of trust or trust deed.

How ‘kids’ can help themselves

Although help from parents can be the best option, there are other ways that can be researched. They can be used in conjunction with parental help if necessary.

• Joint Ownership or buying with a friend or sibling can halve the deposit and other initial costs – it also means a shared burden if interest rates increase.
• Shared Ownership or HomeBuy - these schemes allow new home buyers to invest in part of a property, either paying rent or repaying a loan on the share not owned at the outset, but owned typically by a Housing Association or RSL.
• Flexible or innovative mortgages for first-time buyers are now coming to the fore – a whole raft is available for first timers to pick from – with or without parents.

Full information is available at www.FirstRungNow.com