Land being a finite resource, the situation when it comes to the affordability of homes changes every decade. Someone from the older generations might proudly be able to brag about owning acres of property before the age of thirty. These days, the scenario is vastly different.
Youngsters, by the time they graduate college, are already riddled with problems and financial liabilities like student debt and job instability. The rising prices of property and the stringent requirements for acquiring property loans and mortgages don’t help either.
Thus, most youngsters have to resort to leasing properties till they can find the means to afford a house. Many also turn to their parents and friends for funds.
As a parent, it might sometimes feel like a prerogative to help your child to buy a home. In this article, we will suggest a few ways you can contribute to helping your children be able to buy a house at more affordable prices and settle in. We will also examine how feasible all these might or might not be for you from a financial angle.
According to research conducted by Legal and General in 2020, 49% of new buyers utilised the help of their parents, or affectionately, the “Bank of Mum and Dad” to buy their home!
Are you someone looking to let, sell or buy property in the United Kingdom? Then you can opt for estate agents in the UK to book a free no-obligation sales and lettings valuation to help you out with your property deals.
Gift Them A Deposit
First-time buyers need to turn in a deposit of at least 10% of the purchase price of any property. Again, this also depends on the seller and their demands, which can go way above the minimum. Crossing this bridge is often the toughest part for any first-time buyer, as securing a mortgage is not very easy either.
The government has recently implemented new mortgage policies in light of the difficulties posed by the pandemic. The new mortgage schemes can help the new buyers to acquire 5% of the total amount on a home priced up to £60,000. Though this is a welcome step, scraping together the rest is also not easy. The down payment demand can be up to 25%, so managing the rest 5-20% can be quite difficult.
As a parent, if you have the means, you can offer a ‘gifted deposit’ to cover either a portion or all of the remaining amount. Gifted deposits are not loans, and you will not have any stake in your child’s house. There are no tax implications for funds gifted thus. But at the same time, if you pass away within 7 years of offering them gift deposits, Inheritance Tax will be charged.
Buy A House In Your Name and Rent Or Sell It To Them
This is another strategy that can be used by parents to help out their children. Often, parents might sell land to their children for as low as £1! Though this practice is perfectly legal, it does come with its own set of drawbacks.
If the property to be sold was bought by you more than 10 years ago, and its value has increased since, you will have to pay the Capital Gains Tax for its sale. The catch here is, the actual selling price of the property does not matter; the tax will be calculated based on the market value.
The CGT can range from 18% (for basic-rate earners) to 28% (higher-income taxpayers). You will have to keep this in mind because the total price of your property should be able to cover these costs reasonably so that there are no ramifications later.
Stamp duty is another thing you will have to look out for, if applicable. In case you are the only owner of this property with no mortgage, then stamp duty would not be charged. If you have a mortgage where outstanding finance exceeds the Stamp Duty Thresholds, you will have to pay SDLT for this according to the current rates.
Opt For Joint Mortgage Or Act As A Guarantor
Going for a joint mortgage means that you buy a property with your child. This can be beneficial because the combined income can mean you can take a larger loan.
But there is one major problem with this; if you already own property, this would count as a second home, and the stamp duty would be much higher than what a first-time buyer is charged. The stamp duty will increase by 3%.
You can also opt for the much less common option of being a Mortgage Guarantor for your child. This means that you guarantee 100% of the repayment of the loan. The guarantor can be removed later if the child can afford to prove to shoulder the debt alone.
The issue here is that if there is any delay or failure in the payment, you will be liable to pay up the whole amount.
Use Your Existing Property To Generate Passive Money
If you cannot buy a new property, or afford a sum enough to contribute towards the deposit, but you wish to help your child, do not worry. If you have any property which is not being utilised, you can let it out for different purposes and generate a passive income out of that.
You can give them this amount to cover the deposit. This might prove to be quite beneficial for your child.
On An Ending Note
It is out of the deepest generosity that parents offer to help with financial resources to buy houses. This is because 17% of parents have had to endure lower standards of living, according to research by Legal and General. You must get sound financial advice. and be aware of all the pros and cons of helping out your child.
As with any financial and property transactions, you need to legally sort out many things to not face any ramifications in the future. We advise you to consult professionals with experience in the property market and make good use of their recommendations.
Thus, do consider hiring a good legal advisor and property agency to be able to navigate such transactions without facing difficulty.