In today’s challenging housing market, getting onto the property ladder can be a daunting task for many young people. Parents can play a crucial role in supporting their children to achieve this significant milestone. From early savings to more direct financial support, here are several strategies parents can consider:
Early Savings with ISAs
One of the most effective ways parents can help their children prepare for buying a home is by encouraging early savings. Individual Savings Accounts (ISAs) offer tax-free interest, making them an attractive option for long-term saving.
- Junior ISAs (JISAs): Parents can open a JISA for their child, which allows tax-free savings up to a certain limit each year. The money cannot be accessed until the child turns 18, making it a perfect tool for long-term saving towards a future property purchase.
- Lifetime ISAs (LISAs): For older children, a LISA can be opened for individuals aged 18-39, allowing them to save up to £4,000 a year with the government adding a 25% bonus on top. This can be used specifically for buying a first home or for retirement.
Gifting Deposits
A substantial hurdle for many first-time buyers is saving enough for a deposit. Parents can assist by gifting money towards this deposit.
- Cash Gifts: Directly transferring funds to help with the deposit is common. However, it’s important to consider potential inheritance tax implications if the parent passes away within seven years of the gift.
- Equity Release: For parents who own their property outright or have significant equity, releasing equity from their home can provide the necessary funds. This can be done through lifetime mortgages or home reversion plans, though it’s vital to seek professional financial advice before proceeding.
Acting as a Mortgage Guarantor
For young buyers struggling to meet the lending criteria, having a guarantor can make all the difference.
- Guarantor Mortgages: Parents can act as a guarantor, using their own property or savings as collateral. This reassures the lender that the mortgage will be paid even if the borrower defaults. However, this comes with risks, as the guarantor is liable for the mortgage if the child cannot make repayments.
Joint Mortgages
A joint mortgage allows parents to co-sign the mortgage with their child, combining incomes to improve the mortgage amount they can borrow.
- Joint Borrower, Sole Proprietor Mortgages: This type of mortgage involves both the parent and child being assessed for the mortgage, but only the child owns the property. It avoids additional stamp duty that might be applicable if the parent were also an owner.
Family Offset Mortgages
Family offset mortgages involve using the savings of a family member to offset against the mortgage balance, reducing the interest payable and helping the child to get better mortgage terms.
- How It Works: Parents place their savings into an account linked to the child’s mortgage. These savings reduce the mortgage balance upon which interest is charged, effectively lowering monthly payments and potentially shortening the mortgage term.
Buying Property Outright
In some cases, parents might be in a position to purchase a property outright and then have their child either pay rent or gradually buy the property from them.
- Rent-to-Buy Arrangements: The child can rent the property from the parents with a portion of the rent contributing towards future ownership.
- Gradual Purchase Plans: Parents might set up an agreement where the child buys a percentage of the property over time, easing them into full ownership.
Government Schemes and Incentives
Don’t feel disheartened if you can’t financially help your children. The current climate is tough, but by educating yourself, you can guide them on the help available. Government programs offer some relief for those families unable to provide financial support.
How Do These Schemes Work?
- Help to Buy ISA: The Help to Buy ISA has now closed to new savers, but you can add money to one you’ve already opened until 30 November 2029. This savings account offers a government bonus of 25% on the amount saved, with a maximum bonus limit. The deadline for claiming the Help to Buy ISA bonus from the government is on or before 1 December 2030.
- Lifetime ISA: You can use a Lifetime ISA to buy your first home or save for later life. You must be 18 or over but under 40 to open a Lifetime ISA. You can put in up to £4,000 each year until you’re 50. You must make your first payment into your ISA before you’re 40.
- Shared Ownership: This allows you to buy a share of a property, ranging from 25% to 75%, and pay rent on the remaining share. You can buy more shares later, which is called ‘staircasing’.
- Right to Buy: If you are a public housing tenant, you may have the option to buy your home at a discounted rate. This accounted for 5% of the respondents in the study who received help to buy their home.
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Supporting a child onto the property ladder involves careful planning and consideration of the various options available. Each family’s financial situation is unique, so it’s crucial to seek professional financial advice to tailor a strategy that best suits both the parents’ and the child’s needs. By combining savings, direct financial support, and leveraging government schemes, parents can provide a significant boost to their children’s homeownership dreams.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE.
Some Buy to Let Mortgages are not Regulated by the Financial Conduct Authority.
A lifetime mortgage is a long-term commitment which could accumulate interest and is secured against your home. Equity release is not right for everyone and may reduce the value of your estate.