How to help your children onto the property ladder.
Getting your first foot onto the property ladder in the UK is an increasingly difficult task. Market conditions are tough, interest rates are stubbornly high and the properties themselves come with eye-watering price tags. So as parents, what can you do to help your children onto the property ladder? We begin by looking at some of the options that may be available, what to avoid, and help with a few pointers.
Parents are awesome!
Firstly, for those of you who want to help your children onto the property ladder, remember that you are awesome. It is a extraordinary thing to do and is never without some risk. However, we know that we would do anything for our children and right now times are tough for them.
Today we will cover:
A few stats.
According to Yorkshire Building Society figures released this year, the number of first-time buyers completing a home purchase in 2023 was at its lowest level for a decade. First they calculated that across the UK there were an estimated 290,000 first-time buyers in 2023. Down by around a fifth compared with 2022 figures of 370,000. This marks the lowest point since 2013, when the total sat at 260,000.
Secondly 400,000 first-time buyers registered in 2021. The coronavirus pandemic prompted many to think about changes to their life-work arrangements and a desire for more space. A stamp duty holiday also strengthened sales during this period.
Lastly, the fall in the number of first-time buyers correlates with a drop in activity across all borrower types. Higher interest rates, cost of living pressures and high house prices are all working against aspiring home movers. However, first-time buyers remain determined to invest in their first property. The drop in their numbers has been less severe than the reduction in total buyer activity. Despite this, new borrowers are finding it harder to meet lenders’ affordability requirements.
What are the hurdles facing first-time buyers?
High house prices, as fallout from the coronavirus pandemic when demand was strong, lingered into 2023. The cost-of-living crisis saw rapid increases to the Bank of England base rate and caused lenders to panic. They struggled to adjust to the pace of the increases and found pricing their mortgage range difficult. Some withdrew from the market temporarily. Others introduced more restrictive criteria requirements in an effort to limit business levels. Focus shifted to help existing customers struggling with increased mortgage payments.
As a result of high inflation, many saw their income drop in real terms. Savings intended for a deposit on a house were instead used to fight the cost of rising rent. Also, utility bills, food and other items increased in price considerably. Wages, although now higher than the current rate of inflation, struggled to keep pace with rising costs at their peak.
Interest rates on mortgages for those with less deposit remain high. The pure cost of the mortgage repayment will cause may to fail the lenders stress-tested affordability checks. Therefore, they would look for more deposit, or restrict the borrowing. Often to an amount lower than needed to purchase a suitable property.
Help your children onto the property ladder.
So, with first-time buyers hoping for a big drop in property prices, lower interest rates, and more competitive low deposit options, many face a potentially long wait before they can realistically look at buying a property. There are a few options available though.
Bank of Mum and Dad.
As has always been the case, parents are often called on to provide help when times are tough. The most common form of financial assistance provided by a close family member is by way of help towards a deposit. Many renters spend a large portion of their income on accommodation and bills. Little is left to save for a deposit on a house.
Mortgages are available for first time buyers which only require a deposit of 5% of the property price. However, there are a limited number of them and single first time buyers will need a very strong income to qualify. The larger the deposit the better.
To put this in perspective, let’s look at a first-time buyer(s) looking to purchase a property at the UK national average value of £289,450.
- Minimum deposit of 5% would be needed @ £14,480 (rounded up slightly)
- A mortgage of £274,970 would be required to make up the difference.
- Competitive current deal fixed for 2 year at 5.33%, with a £999 product fee.
- Over a 30 year term this would equate to a repayment of £1,529 each month.
- A household income in excess of £60,000 would be required to achieve this mortgage, and assumes no other debts, travel costs or deductions from salary that may affect the loan amount possible.
However, if parents were able to offer help with a gifted deposit of 10% taking the total deposit to 15%, the monthly repayment will drop to £1,297 over the same term. The rate of interest available would be closer to 4.84% fixed for 2 years, and a household salary closer to the £50,000 mark would be required to support the mortgage as lenders can often lend more money when a larger deposit is offered.
Gifted deposit.
A gifted deposit helps your children onto the property ladder. The term gifted deposit indicates to the lender that the funds provided are a gift and are not expected to be repaid. The donor of the gift will also need to confirm that they will hold no legal charge over the property because of the gift. If the deposit was to be repaid, the lender will want to know what the repayment terms are likely to be and factor these into their affordability calculations.
The donor of the gift should usually be someone with a personal or family connection to the person applying for the mortgage. The lender or the acting solicitor will want to verify the identity of the gift donor. They will also want to see evidence of funds to satisfy their anti-money laundering checks.
Some lenders may also prefer at least some of the total deposit to be coming from the applicant’s own funds. This shows that they have tried to save and have managed their disposable income well in the past.
Joint Borrower, Sole Proprietor.
Joint Borrower, Sole Proprietor is a type of mortgage where not all parties to the mortgage are legal owners of the property. For example, two people can be named on the mortgage application and have their income assessed, but only one will be the named legal owner and occupier of the property. It provides an option which may be more affordable for borrowers who have saved a deposit but don’t have the income to support the mortgage amount needed. By allowing another party to join the mortgage their income can be used can help bridge the gap.
Who can be a supporting borrower?
Firstly, there aren’t really any restrictions regarding who can be the supporting party alongside the first-time buyer. Plus, this mortgage scheme is available to all borrower types, not just first-time buyers. This means that you aren’t restricted to just family members when it comes to who can help. In many cases up to 4 people in total can be considered on the application. Therefore, a single main borrower could be supported by up to 3 other supporting parties. Or a main borrower couple could have up to 2 supporting parties.
Secondly, supporting borrowers will be assessed in line with normal mortgage procedures. This will include a credit check, income assessment and by reviewing any outgoings or credit commitments that they may have. All parties will be responsible for maintaining the repayments. However, as supporting borrowers will not be the legal owner of the property once complete, they will always need to seek independent legal advice before agreeing to be part of the application.
Finally, the maximum term of the mortgage will usually be determined by the age of the eldest income providing party. So, in order to keep the repayments as affordable as possible, it is more beneficial to consider this option if the supporting borrowers are still relatively young themselves. Deposits of as little as 5% can be considered.
Family offset mortgages to help your children onto the property ladder.
These are a modern alternative to gifted lump sum deposits. As such there aren’t many of them around as they are still a niche product. They can be a little more flexible than simply gifting a large lump sum as a deposit. For an example of how a regular offset mortgage works check out our terminology guide here.
For example, a simple offset mortgage works like this:
- You need a mortgage of £200,000…
- And your linked savings account has £30,000 in it.
- An offset mortgage offsets the amount you have to pay on your mortgage against what is in your savings account. Note: you won’t earn any interest on the amount in the saving account linked to the mortgage.
- So, you only have to pay interest on the remaining amount of £170,000 (£200k – £30k). This means lower monthly payments and possibly helps pay the mortgage off early.
Family offset version.
In a family offset mortgage, the savings account linked to your mortgage account belongs to your family member. They can use this in lieu of a lump sum gifted deposit.
- Say you need a £200,000 mortgage.
- Your parents put £50,000 in a savings account linked to the mortgage.
- The amount you actually borrow is £150,000 (75% loan-to-value)
To start with, as you will be borrowing less overall in the above example, a mortgage product with a lower rate of interest may be possible due to the loan-to-value percentage being lower. Likewise, this size mortgage can be obtained with a lower income.
The funds in the linked parents savings account will not earn any interest. Therefore, care should be taken by parents to ensure that they explore all other investment options. However, they can be useful for high rate taxpayers as interest is not earned on the linked funds where they may be elsewhere. Additionally, as funds remain in savings, your parents retain access to them in the future. There will be restrictions on when and how much can be withdrawn through as the lender will want to check you can afford the higher repayments when you mortgage balance increases.
Inter-family sale.
This can also be known as a concessionary purchase, or a genuine bargain price.
Parents who own a property are able sell it to their children at below market value and in some cases no deposit is required. Further benefits of this are that the children pay less stamp duty, there should be no estate agency fees and the purchaser can benefit from better mortgage deals.
For example:
- Assume you are a parent and own a house with a market value of £400,000. You want to downsize to a smaller house on the market at £300,000. Also, you want to help your children onto the property ladder.
- You can sell your current house to your child for £300,000, leaving you with enough to buy the new house.
- As the true market value is £400,000, the lender can treat the difference between the market value and sale price as a form of gifted equity deposit.
- Therefore, the family member purchasing the house can apply for a mortgage for £300,000 with no deposit required. The product that they choose will be based on the 75% loan-to-value range (as the gifted equity is equivalent to a 25% deposit) so should have a competitive interest rate.
Finally, the lender may want to check that there is an onward purchase in place for the parents or that they will no longer be residing in the property once the sale has completed.
Guarantor.
Guarantor mortgages are not as common as they used to be. There are a few lenders still offering them under some circumstances. Guarantors are used to help support a mortgage for someone who may have had credit related issues in the past or may be a recently graduated professional who expects their income to increase dramatically in the future i.e. doctor. This means that a guarantor may be able to help the main borrower achieve a larger mortgage than they have been cleared for alone.
For example:
- Someone may be able to borrow a sum of £200,000 in theory but due to the result of a credit check, this has been restricted to no more than £150,000. A guarantor could be used to provide the lender with enough security to agree the original £200,000.
Typically, a guarantor is someone who promises to step in and continue making mortgage payments on behalf of the main borrower if they were ever unable to do so themselves. In some cases, they may promise to clear the entire balance if the main borrower falls behind. Usually, it is expected that the guarantor be a close relative or person with a strong connection to the applicant. In most cases the guarantor is expected to be a property owner.
A guarantor is not a legal owner of the mortgaged property. They will be liable for the mortgage repayments and balance though so in all cases guarantors are expected to seek independent legal advice first.
A guarantor can be removed from their commitments once the main borrower is in a position to prove they can cover the full commitments and the responsibility of the debt themselves.
Summary – How to help your children onto the property ladder.
Begin by thinking carefully about how you want to help your children onto the property ladder. Secondly, take advice where you can and weigh up all the options relating to your risk. Speak to a good mortgage adviser to run through the options in more detail. However, times are especially tough for first time buyers now or those who have been out of the property market for a while. In conclusion, any help you can offer will be greatly appreciated, I am sure.
Post compiled by Grant Carpenter CeMAP, CeFA – 15 years of regulated mortgage advice.
Please note that the content listed within this remortgage guide is purely for information purposes only and does not constitute advice.
