As a first time buyer, it can be difficult to save up a deposit which is large enough to secure a mortgage and whilst the likes of the Help To Buy Scheme are doing a fantastic job at making it easier for individuals and couples to get onto the property ladder, the fact still remains that at least a 5% deposit will be required. In some areas, this can mean anything between £4,000 and £5,000, working a house priced £80,000 – £100,000, however in other areas, this could end up needing to be £10,000 or more – not the easiest figure to save up whilst working on minimum wage.
As such, more and more parents are helping out and either gifting or lending money to their children for a deposit, however is it really so simple or are there things to take into consideration? Our mortgage broker, David Sharples, has put together a number of consideration points which you’ll find below.
Is The Deposit A Gift Or A Loan?
Whilst technically there’s no issues with a parent providing a deposit for their children to buy a home (other than the fact that lenders look more favourably on those who save up their own due to demonstrable money management), it’s important that it’s made clear whether it’s a gift or a loan.
The easiest way for parents to provide a deposit is to give it as a gift which means that they don’t, in any way, shape or form have any financial interest in the property. In this instance, lenders will simply ask for a letter from the parents which state that it is in fact a gift and that it will not need to be repaid at any point.
One consideration here, however, is that if the parent dies within seven years of making the gift, this is likely to be treated as part of their estate and may be eligible for inheritance tax. Given that inheritance tax only comes into play if both parents die and the estate left is more than £325,000, for most this won’t become an issue.
If, on the other hand, the deposit is a loan and must be repaid, lenders will take this into account when looking at affordability, assuming regular repayments will need to be made. This, of course, means that when parents gift a deposit, you’ll usually not be able to borrow as much as you would be able to if it had been given as a gift.
Protecting A Gift From Relationship Breakdowns
If one set of parents is gifting a deposit, you may want to consider protecting this from a relationship breakup further down the line. At the very least, this needs considering, especially if you’re not married and have no children.
For as little as £100, you can get a ‘Deed Of Trust’ drawn up by a solicitor which will outline how equity is to be divided should a relationship break down. It’s a small price to pay for peace of mind.
How About Buying Together?
If your parents are still working, buying together could be a great option. This does, of course, mean that both yours and theirs names are on the deeds, making you jointly responsible for making repayments. In many cases, you’ll find that it’s easier to secure a mortgage under a joint application like this and you may also be able to borrow more.
Always take into account the fact that, however, your parents could be liable for capital gains tax should you sell the property and it be their second home.
It’s well-advised that you seek professional advice if this is something which you’re considering, taking into account the age of your parents and the fact that many lender’s won’t extend a term beyond the age of 65 or 70.
Perhaps another option for some, if parents are homeowners with a significant level of equity, is to consider a guarantor mortgage. In short, this means that they act as guarantors for your mortgage payments, guaranteeing to pay if you don’t. Whilst not for everyone, there is a catch – a ‘charge’ is placed on your parents home and in the event that you default on your mortgage payments, the mortgage lender can pursue your parents for payment.
The plus side, however, is that you’ll often be able to borrow more with a guarantor in place.
If you’re considering your options for your parents helping you get onto the property ladder, why not get in touch with one of our expert mortgage brokers to discuss your situation? We’re available on 0800 756 7794 7 days a week between 8am and 10pm!