In recent years, the rising cost of house prices has meant that many young adults have struggled to take the first step onto the housing ladder.
According to figures from the Office for National Statistics, the price of the average UK house now stands at £250,000, requiring buyers to save up a significant amount of money just for a deposit.
If you’re looking to secure a mortgage but are struggling to do so, you may be able to get help from your parents. Read on to find out three ways that they can help you get onto the property ladder.
1. By gifting or loaning you money for a deposit
One of the simplest ways that your parents can help you is with direct financial support so that you can afford the mortgage deposit. This is especially helpful if high rent makes it difficult for you to build up the necessary cash.
A financial gift from your parents may also allow you to put down a larger deposit on a property, such as 15% instead of just 10%. This can be useful as you may find that you get a more favourable mortgage with a larger deposit, such as one with a lower interest rate.
However, before your parents help you in this way, you may want to discuss the financial implications of gifting with them.
For example, if they pass away within seven years of making the gift, there may be Inheritance Tax (IHT) liabilities to consider. If the gift exceeds their annual gifting allowance (£3,000 for an individual in the 2021/22 tax year), their estate may also have to pay tax on it.
Furthermore, while the gift can make a significant difference to you, you may want to ensure that they can afford to give it, so that it doesn’t impact their financial wellbeing.
If gifting isn’t an option, an alternative solution is for your parents to loan you the money instead, which you can repay in regular instalments.
If you think this would be beneficial for you, it’s important to formalise the agreement by putting it in writing. This can make sure there are no disagreements or misunderstandings about the length of repayment, total value of the loan, or any interest that you may have to pay on it.
Having the agreement in writing could also help you if there are any IHT issues. On top of this, if you’re buying with a partner, a formal agreement can provide guidance for how the property – and any money provided by your parents – should be split if you separate.
2. Acting as a guarantor for your mortgage
If direct financial help isn’t an option, another alternative is to ask your parents to act as the guarantor for the mortgage.
What this essentially means is that they are pledging to make mortgage payments on your behalf if you’re unable to do so. This may involve offering some of their savings, or even their home, as security.
One benefit of this is that it potentially allows you to borrow up to 100% of the property’s value, as the collateral your parents are putting forward can act as the mortgage deposit. This can be particularly useful if you’re struggling to afford the deposit or have a poor credit history.
However, it’s important to bear in mind that this arrangement means your parents would be liable for the costs of the repayments, and the mortgage debt, if you’re unable to make them.
This can potentially put them under significant financial strain. In the worst-case scenario, they could end up losing their home if it is used as security against the mortgage.
3. Taking out a joint mortgage with you
If the potential risks of asking your parents to act as guarantor makes you uncomfortable, another way that they could help you is with a joint mortgage.
The main benefit of a joint mortgage is that it allows you to include your parent’s income along with your own, which can mean that you’re more likely to meet lender’s affordability checks. This then means you may be able to secure a larger loan or a greater range of mortgage deals.
Like with the option to act as guarantor, this means that your parents’ names are on the mortgage. If they already own a home, this may make them liable for additional Stamp Duty or Land and Building Transaction Tax (BLTT).
One potential way to avoid this is by using a “joint borrower, sole proprietor” mortgage arrangement. Essentially it is similar to any other joint mortgage but with two key differences – only the top two incomes are taken into account, and only your name will be on the mortgage.
This means that your parents can still help you to meet affordability checks and the property won’t be subject to additional Stamp Duty charges or LBTT surcharges.
However, there is still a financial risk to your parents if you are unable to make repayments.
If you’re unsure which form of assistance would be the most beneficial, you may benefit from seeking professional help. Working with a mortgage adviser can help you to weigh up the pros and cons of each option so you can find the right method for you.
Get in touch
If your parents want to give you a helping hand to get onto the property ladder but aren’t sure of the best way to do so, please get in touch. Email email@example.com or call us on 01832 272653.
Your property may be repossessed if you do not keep up repayments on your mortgage.