Parents: helping your child onto the property ladder

It’s increasingly difficult for young people to get on the first rung
of the property ladder alone, as property prices are rising much more
quickly than earnings. This is where parents can help. Just as
mortgages shared by friends are becoming more and more common, so too
are shared mortgages with other family members. There are even some
specifically tailored mortgage products on the market to suit first
time buyers whose parents are helping to augment their borrowing
capacity to enable them to afford their own home.

In some ways it can be less complicated for first time buyers than
taking out a mortgage with friends, as friends will inevitably want to
move out after a certain length of time and clear agreements need to be
established as to what happens to the property. Mortgages arranged with
the help of parents mean that children can often afford a place of
their own without having to share.

Although it may be simpler for the child, there are various tax and
financial implications for the parents which must be considered before
entering into such an arrangement.

There are three ways in which parents can help their children get their
own property. The first is where one or more parents acts as a
guarantor to the child’s mortgage, agreeing to take on the
responsibility for meeting the repayments should their offspring be
unable to do so. Their finances will be assessed by the mortgage lender
to determine whether they are deemed financially able to take on the
liability. It’s likely that the parents will need to be earning a
fairly sizeable income to be able to guarantee a second mortgage on top
of their own. Most lenders will require the parents to guarantee the
whole mortgage amount, although there are some that enable the parents
to guarantee just the excess amount (i.e. the amount over and above
what their child can afford to borrow based on their income).

When parents act as guarantors, they have no legal claim on the
ownership of the property or any equity from it as they will not be
listed on the mortgage deeds. It’s a good option for helping your child
if you don’t want to have anything to do with the property. It means
that you won’t be liable to pay capital gains tax on any profit made
from it when it is sold.

If you do take on a guarantee of a mortgage for your child, you will
probably only want to do it until they can afford to take on the whole
mortgage themselves. Once they’re earning enough, you can have your
guarantee cancelled.

Something that you will need to be aware of is that because you are not
on the mortgage agreement or title deeds, you will not receive any
correspondence about the mortgage from the lender, so if your child is
having trouble making repayments you may not find out until you are
called to uphold your guarantee.

Another potential drawback is that your child’s mortgage amount will be
deducted from the amount you can borrow if you even apply for another
mortgage in your own name. If your home circumstances might change or
you might need to move house, being a guarantor may not be a wise
option for you.

The second method is to take on a joint mortgage with your child,
selling or gifting your share to them when they can afford to take it
on. You will be named on the mortgage agreement and deeds and will be
jointly liable for making repayments. If your child defaults on
payments, you will be responsible for covering them. There are other
tax and financial implications when taking on a joint mortgage if you
already have an existing mortgage.

As you’ll own a second property which is not your main residence, you
may be liable to pay capital gains tax on any profit when you hand over
your share of the property. Additionally, stamp duty might have to be
paid on properties worth over £125,000 as the transaction will be
considered to be the same as any other property sale or purchase.

The third option is to gift a lump sum to your child to help them put
down a deposit for a mortgage of their own. Ways in which you could do
this are to obtain an advance on your own mortgage, remortgage your
house to release equity or take money from your savings.

Again, gifts may be subject to tax implications. If your total estate
is over the inheritance tax threshold of £285,000, the gift will
be considered as part of your own estate if you die within seven years of
donating it to your child and tax will then have to be paid on any gift
over the £3,000 annual allowance when your estate is settled.

Most lenders are happy to accept deposits from parents, although some
may not be keen if you are loaning rather than gifting the money to
your child and are expecting repayments with interest, as this could
affect their borrowing capacity.

Due to the tax and other financial issues involved in all of these
options for helping your child to get their own home, it is strongly
recommended that you see a financial expert who will examine your
circumstances and provide you with advice on how best to approach the
matter.