12 May 2016
Author: Stephen Breen
Soaring house prices mean that 62% of first time buyers need assistance – usually from the Bank of Mum and Dad – to get a foot on the housing ladder. Figures published by the Council of Mortgage Lenders show that nearly two thirds of first-time buyers would not be able to buy their first home without help from parents or relatives.
With the average price of a home being around £215,000, it should come as no surprise that so many are struggling to reach homeowner status. The average deposit is over £26,000, more than most people in their twenties earn each year.
If you are a parent or grandparent thinking of helping your child or grandchild out with their first house purchase, you may want to consider some of the financial products and incentives that are specifically designed for this purpose.
Barclay’s Family Springboard Mortgage
Barclay’s new version of their Family Springboard mortgage allows your child to purchase their first home without a deposit, provided that you act as guarantor and deposit 10% of the price of the home into a savings account (known as ‘Helpful Start’) with the bank for a three year period. As guarantor, you get your money back after three years with 2% interest on top, provided that your child makes all of their repayments.
The mortgage rate is fixed at 2.99% for three years, assuming there is no deposit. If the child can make a 5% deposit (on top of the guarantor’s 10% ‘bond’), they will instead benefit from a better rate of 2.79%.
Barclays will lend up to five and a half times your child’s income for this type of mortgage, although they will still need to prove that they can meet the repayments. Should they fall behind or should their home be repossessed, the 10% deposited in the savings account will be used to recoup any money that the bank has lost. However, it’s worth knowing that since the Springboard mortgage was originally launched in 2013 (where a 5% deposit was a necessity), not a single property has been repossessed.
The Springboard mortgage is a great way to help children without handing them cash – allowing parents or grandparents to use the cash for themselves or another child in the future. As a bonus, there’s no application fee for this product.
Aldermore’s Family Guarantee mortgage
If depositing 10% of the house value to help your child or grandchild is out of the question, another option might be to allow a lender to take a charge on your property. If your child or grandchild should miss a repayment, the lender can ask you to either remortgage your property or (if necessary) sell it, to cover the missed payments.
Aldermore’s Family Guarantee mortgage will lend up to 100% of the house price under this arrangement, with any borrowing over 75% of the value secured against your home.
As an example, if your daughter sees a property she would like to purchase for £150,000, she can borrow the full amount (subject to passing affordability tests) using this type of mortgage. As you will be acting as a guarantor for your daughter, Aldermore will have a charge over your own home – and will be able to recover up to £37,500 should your daughter miss her mortgage payments. There are two options at this time: a two year fixed rate of 5.48% or a three year fixed rate of 5.68%, and both incur a £1,298 fee.
Aldermore is not the only lender offering this type of deal: Tipton & Coseley Building Society and Bath building society both offer similar products (called the ‘Family Assist’ and ‘Parental Assistance’ mortgages respectively).
A further product that allows you to help your child or grandchild out is an intergenerational mortgage. St James’s Place and Metro teamed up to offer these to SJP clients from last month, and they provide three options to buyers.
First, parents, grandparents or other family members may all out gift money to a child or grandchild to increase their deposit.
Second, they may open a secured deposit account where money can be deposited to provide extra mortgage security, without the money actually going to the child.
The third option is to make a joint application – for example, the parent or grandparent can apply for the mortgage with the child. In these cases, Metro Bank does not ask that the parent or grandparent is named on the title to the property, ensuring that they are not stung by the second home stamp duty charges.
Inheritance tax implications
If you do decide to all out gift money to a child or grandchild, you must survive for 7 years following the gift – otherwise inheritance tax may be due on the value of the gift. The exception to this is that you can give up to £3,000 a year exempt from IHT and you can also gift up to £5,000 as a wedding or civil partnership gift (or £2,500 as a grandparent).
It’s worth knowing that you can backdate this by one tax year – so parents could immediately give their child £12,000 (each would give £3,000 for this year’s gift allowance and £3,000 for last year’s gift allowance) towards a deposit, without having any inheritance tax concerns.
Lifetime and Help to Buy ISAs
If your child isn’t immediately buying their first property, it’s worth considering opening a Help to Buy ISA and using that to help them save for a deposit. You can deposit up to £1,200 when you open the account, then £200 a month afterwards. When it’s time to withdraw the money, the Government will boost the balance by 25%, up to £3,000. If your child is buying the property with a partner, they can also have a Help to Buy ISA and enjoy the same limits.
The Help to Buy ISA scheme will be closed to new savers after November 2019. However, next April the Lifetime ISA is being introduced which works in a similar way. This is open to anyone aged 40 or under and gives the same 25% top up from the Government on withdrawal. The difference is that you can put up to £4,000 a year into the Lifetime ISA and it can be invested in stocks and shares. The Help to Buy ISA by contrast is a cash only ISA and you can’t pay more than £2,400 into the pot.
It makes sense to open a Help to Buy ISA now and switch over to a Lifetime ISA when it becomes available next April. Both Halifax and Santander are offering 4% interest on their Help to Buy ISA accounts.