The Bank of Mum and Dad now funds more than a quarter of all home purchases. Here are your options if you want to make the most of the Stamp Duty exemption.
Changes to Stamp Duty
In his 2017 Autumn Budget, Chancellor Philip Hammond announced that as of 22 November, Stamp Duty has been abolished for certain first-time buyers.
Those who are buying properties up to the value of £300,000 (or the first £300,000 of a £500,000 purchase in London and more expensive areas) won't have to fork out anything for Stamp Duty.
You can help your offspring onto the property ladder free of Stamp Duty with these methods.
Can you afford it?
If you want to help your kids out financially, the first thing you need to work out is: can you afford it?
Some parents will have savings or investments they can cash in. But others will need to borrow money against their home to help their kids out.
There are several ways to do this. Some parents could remortgage to release equity in their home, while those who don’t want to switch mortgage deals could get a loan secured on their home instead.
Older borrowers might be interested in equity release schemes which allow you to borrow money against your home, with the capital and interest repaid after your death or when the property is sold.
If you decide to borrow money to help your children, it’s a good idea to get some professional financial advice first.
Helping with a mortgage deposit
The most common way parents help out is by giving their child some, or all, of the required deposit to qualify for a mortgage.
Lloyds Bank says the average loan first-time buyers received from family is almost £24,000. But it doesn’t stop there – almost one in five 'second steppers' return to the Bank of Mum and Dad to move up the ladder, typically asking for £22,000.
Parents who want to help their kids with a deposit can either gift them the money, or lend it to them.
Gifting money can have consequences for Inheritance Tax (IHT). IHT is paid if a person’s estate is worth more than £325,000 when they die. However, someone can pass on an additional £100,000 if they're leaving property to a family member (rising to £175,000 by 2020).
The donor must live for seven years after giving the gift for the amount to be exempt of IHT. Any gifts made less than seven years before death count towards the threshold.
Obviously, no one knows when they are going to die which makes IHT planning tricky. In an ideal world, parents would give their child as much as they want or need, then survive for seven years or more.
Some gifts are exempt from IHT. For example individuals can give £3,000 away each year with no IHT implications. Leftover annual exemption can also be carried over from one tax year to the next, but the maximum exemption is £6,000.
You can give away more if the recipient is getting married or entering a civil partnership – £5,000 if it’s your child, £2,500 if it’s a grandchild or great-grandchild, and £1,000 for anyone else.
Some parents may prefer to lend their children money, with it being paid back monthly or at some point in the future – when the property is sold, for example.
Drawing up a loan document can be fairly straightforward and should set out any interest payable and the repayment schedule. It needs to be signed by both parties.
Ideally the agreement would set out what will happen to the money if one of the parties dies, or if the parent needs the money back.
If your child is buying a property, any loan agreement would need to be disclosed to the mortgage lender to be factored into the affordability assessment.
Guarantor and joint mortgages
Parents can also help their children onto the property ladder by acting as guarantor on their mortgage.
This means their income is taken into account when agreeing a mortgage deal, potentially allowing the child to borrow more.
The number of lenders who offer guarantor mortgages is dwindling, but Aldermore is one of the few that still do.
However, as a guarantor, the parent would have to agree to cover the child’s mortgage payments if they were unable or unwilling to do so.
Another option is for parents and children to take out a joint mortgage on a property, known as a 'joint borrower, sole proprieter' mortgage. The difference here is that the parent would legally own a share of the property. Both parties would be jointly liable for mortgage repayments.
This boosts the amount you can borrow, but the child's name appears on the title deeds. Clydesdale Bank, Barclays and Market Harborough Building Society do these types of mortgages but Barclays borrowers need to be aged under 70 at the end of the mortgage term and the age is 70 with Clydesdale for its interest-only loans.
Some mortgage lenders offer products which allow parents to offset their savings against the child’s mortgage, meaning they qualify for a much cheaper deal.
For example Barclays offers the Family Springboard Mortgage.
The buyer’s “helpers” deposit 10% of the purchase price in a Barclays Helpful Start account – where it stays for three years. After three years the helper gets their savings back, with interest, assuming certain conditions have been met.
The selling point is that the rate for the Family Springboard Mortgage is significantly cheaper than a mainstream mortgage. The rate sits at 3% for 100% loan-to-value mortgages but this drops to 2.49% for those who can stump up a 5% deposit.
The Lifetime ISA allows savers aged 18-39 to stash away up to £4,000 a year and bag a 25% top-up from the Government. The money must be withdrawn for a buyer's first house, up to the value of £450,000. It can also be used for retirement. If the cash is used for something else, you'll be charged a 25% penalty fee.
Skipton Building Society is the only provider so far, offering a savings rate of 0.75%.
It can be tempting to stick with your bank but you're better off looking around lesser-known providers, especially building societies.
For example, the Family Building Society has a mortgage that allows up to 12 family members to team up and help a young person. To do this, the relatives need to cover at least 20% of the purchase cost by putting a minimum of £5,000 into a savings account with the building society, accepting a charge on their own homes, or a combination of the two.
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