Supporting the
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House prices are going up and mortgages are harder to afford. Because of this, many first-time buyers and people looking to move are asking their families for help.
A guide for Parents and Children on gifting a property deposit
Buying a home is a big step in anyone’s life. But for many young people today, saving for a deposit and finding an affordable mortgage is harder than ever. House prices are going up and mortgages are harder to afford. Because of this, many first-time buyers and people looking to move are asking their families for help.
In this guide, we will talk about how parents can help their children buy a property. We will cover gifting money, government support, tax implications, and the family’s dynamics. It’s not just about giving; it’s about making informed choices for both the parents’ and children’s financial futures.
What this page covers:
Why the need for support?
The challenges that first-time buyers, people looking to remortgage, and those moving homes face are pretty obvious.
In the UK, property prices have risen significantly in the last ten years, often growing faster than people’s wages. Many first-time buyers struggle to save enough money for a deposit or to get a big enough mortgage. That’s why help from parents has become so important for buying a home.:
- House Prices vs. Wage Growth: While property prices have increased dramatically in many parts of the UK, salaries have not kept up. The average first-time buyer now needs to save tens of thousands of pounds just for a deposit.
- High Rents: With the rental market becoming increasingly competitive, many potential buyers find that their rent takes up such a large portion of their income that saving for a deposit is nearly impossible.
- Affordability Tests: Even for buyers with a solid income, mortgage lenders are more stringent about affordability checks, which means some buyers can’t borrow as much as they need without help.
- Interest Rates: As interest rates fluctuate, so too does the affordability of monthly mortgage repayments. Higher interest rates can reduce the amount first-time buyers are able to borrow.
These factors make it clear why parental support has become essential for many, whether through gifted deposits, Guarantor Mortgages or JBSP Mortgages.
Space for all parties to think
Creating a Safe Environment for Discussions
When considering the option of providing financial assistance, contributing to a property purchase or becoming an Income Booster, both parents and children must carefully consider the potential emotional and financial consequences. Getting caught up in the thrill of getting a new home is completely understandable. However, making quick money decisions can end up making you feel bad or straining your relationships.
Key considerations for parents:
- Can you afford to help? Can you afford to give money without it messing up your own financial future or retirement plans??
- Will the gift be equal across all your children? If you have more than one child, is this a one-time gift, or will you need to provide similar support to others?
- Are there any expectations? Do the parents expect anything in return for their financial contribution, such as recognition in wills or from other family members? Do they expect the money to be repaid, or is it intended as a no-strings-attached gift?
For children:
- Understand the implications: Accepting financial help can come with expectations. You may feel indebted or pressured to repay your parents in other ways.
- Open communication is vital: Be transparent with your parents about your financial situation and make sure everyone’s on the same page about the type of help being given.
Making sure there’s enough time and room for discussions lets everyone make informed decisions without feeling rushed.
Available government schemes: Pros and Cons
While parental support is important, it’s crucial to be aware of government schemes that could assist first-time buyers. Here, we’ll outline the most relevant schemes and their advantages and drawbacks.. Please bear in mind that these schemes are constantly changing so do visit https://www.gov.uk/affordable-home-ownership-schemes for the latest information.
Help to Buy: Equity Loan
Pros:
- The government lends up to 20% (40% in London) of the purchase price for a new-build home, reducing the deposit needed from the buyer.
- No interest for the first five years.
Cons:
- The loan is interest-free only for a limited time.
- It’s only available on new-build properties, which can limit options.
- Buyers must repay the loan when selling, which could affect the profit on the sale.
Shared Ownership
Pros:
- Allows buyers to purchase a share of a property (usually between 25% and 75%) and pay rent on the remaining share.
- Buyers can increase their share (staircasing) over time, potentially owning the full property.
Cons:
- You’ll still need a deposit and mortgage for your share, and rent for the remaining portion.
- You’ll have less control over the property and face restrictions if you want to make changes.
- Selling a Shared Ownership house is Fraught with complications
- Service charges can be high.
Lifetime ISA (LISA)
Pros:
- You can save up to £4,000 each year, and the government will add a 25% bonus, up to a Maximum of £1,000 a year.
- Can be used either for a first home or retirement.
Cons:
- If you withdraw the money for any other reason before age 60, you’ll lose the government bonus and may face a penalty.
- Property price limits apply, and this scheme may not be viable for buyers in high-cost areas.
First Homes Scheme
Pros:
- Offers a 30%-50% discount on the market price for first-time buyers, particularly aimed at key workers and Local residents.
- The discount stays with the property, benefitting future buyers.
Cons:
- Restricted to certain locations and available only on new-build homes.
- The resale process can be more complex, as future buyers must meet specific criteria.
Mortgage Guarantee Scheme
Pros:
- Encourages lenders to offer 95% mortgages to buyers with just a 5% deposit.
- Can make home ownership more accessible without needing a large deposit.
Cons:
- Higher interest rates are often associated with low-deposit mortgages.
- Not all lenders participate in the scheme, limiting your options.
Gifting money for property: Different ways to help
Parents have several options for financially helping their children purchase a property. Each method has its own implications for both the parents and children, so it’s essential to understand all the options fully:
Joint Borrower Sole Proprietor (JBSP) Mortgages
In a JBSP mortgage, parents are party to the Mortgage Application, which helps with the affordability calculation, but do not own a share of the property. They’re responsible for making payments if their child cannot.
Advantages:
- Parents’ income boosts the child’s borrowing capacity without the complications of joint ownership.
- Since the parents are not listed on the property deeds, the child may still be eligible for first-time buyer stamp duty relief.
Considerations:
- Parents will be tied to the mortgage, which can affect their own ability to borrow in the future.
- It’s a long-term commitment, as they are liable for the mortgage payments if the child cannot keep up.
- Both parties must have an exit strategy, meaning they need to determine when the children will have sufficient income to take on the mortgage debt independently and remove the parents from the mortgage.
Gifted Deposits, aka Deposit Boost
This type of assistance is frequently seen where parents provide a sum of money to be used as a deposit. Lenders will typically ask for confirmation regarding whether the money is a gift or a loan. It’s important to note that some lenders may refuse to accept it if it is considered a loan.
Advantages:
- Straightforward and helps the buyer access better mortgage deals.
- No need for legal or tax complications unless large sums are involved.
- Gifting of Deposit could help to reduce the Parent’s IHT bill.
Considerations:
- Parents need to understand the gift’s tax implications.
- There may be emotional strings attached, especially if family dynamics are complex. A gift might be ok now but what happens if the relationship breaks down
Acting as a Guarantor
A guarantor mortgage is where parents can guarantee the mortgage by offering their own home or savings as collateral.
Advantages:
- Helps buyers access a higher loan amount or lower interest rates.
Considerations:
- Parents risk losing their own home or savings if their child defaults.
- Only a few lenders offer guarantor mortgages.
Equity Release
Older parents may consider releasing equity from their own home to gift to their children.
Advantages:
- Allows parents to give a large lump sum without affecting their savings or income immediately.
Considerations:
- Equity release comes with its own risks and costs, such as compounding interest or reducing the inheritance available to other children.
Thinking About the Future: Parents' Financial Needs
Parents need to focus on planning for their own future financial needs before giving significant financial help to their children. While helping children buy a home is commendable, it’s important to make sure it doesn’t harm the parents’ long-term financial security. Here are some important long-term factors to consider:
Retirement Planning
- Do parents have enough saved for retirement?
- Will they need access to the gifted money in the future, or will it impact their ability to support themselves later in life?
- How will this affect future care needs, such as long-term care or medical expenses?
Future Income
- Will parents need to maintain some savings or investments to ensure they have an income in later years?
- Could gifting money today mean cutting back on their lifestyle or future plans, like travel or hobbies?
Inheritance Considerations
- If the gift reduces the size of the estate, how will this affect other children or beneficiaries?
- Do you think giving more money or assets to one family member could cause tension among the rest?
Remember, it’s really important to help out your kids, but it’s also crucial for parents to look out for their own financial future.
Understanding Tax Implications
The 7-Year Rule
When parents gift money, it’s important to be aware of the 7-year rule in relation to inheritance tax (IHT). Under UK law:
- Gifts are exempt from inheritance tax if the giver lives for seven years after the gift.
- If the giver dies within seven years, the gift may be subject to IHT, though taper relief could reduce the tax owed if the death occurs after two years.
Annual Gifting Allowances
- Each person can gift up to £3,000 a year without any inheritance tax implications. If you didn’t use this allowance the previous year, you can gift up to £6,000.
Large Gifts
- Gifts above these allowances may be subject to IHT if the giver passes away within seven years.
- To make sure their gifting strategy fits their immediate goals and long-term estate planning, parents should get advice from a financial advisor.
Understanding Legal Implications
Independant Legal Advice ( ILA)
When you apply for a Joint Borrower Sole Proprietor (JBSP) mortgage, it’s important for everyone involved to get independent legal advice (ILA). This is because JBSP mortgages involve joint borrowers, but only one person will legally own the property. This could create legal and financial risks for the other borrower(s). Independent legal advice will help you understand the lack of ownership rights, potential financial liability, future disputes,discuss ways to protect the interests of the non-owner borrower, and confirm understanding. It’s important to choose a solicitor separate from the one handling the mortgage conveyancing to avoid conflicts of interest.
Points to consider
- Independent legal advice is a vital step in the JBSP mortgage process. It safeguards both the joint borrower and the lender by ensuring that all parties understand their rights and responsibilities
- All lenders will require proof of independent legal advice for all joint borrowers before issuing a mortgage offer.
- Independent Legal Advice will be an additional cost, which is never welcome; however, taking this step seriously can prevent future legal and financial complications.
Navigating family dynamics: Will other siblings need money too?
Giving money to buy property can complicate family relationships, especially if other children also need help. It’s essential to think about how this will affect the whole family and talk openly with everyone involved.
Questions to Consider:
- Fairness: How will you ensure that your financial support is fair and equitable across all your children?
- Future Expectations: If you help one child now, will you have the financial capacity to help others in the future?
- Communicating with Siblings: Be clear with all family members about the reasoning behind your decision to gift money to avoid potential misunderstandings or conflicts.
This encourages families to approach gifting with transparency and fairness, ensuring all parties feel heard and respected.
Parents often face a big decision when they consider giving money to their children to help them buy a home. To make the best choice, parents should take time to look at all the options, understand the legal and tax issues, and openly talk about family relationships.
Disclaimer
The information provided in this guide is for general informational purposes only and does not constitute financial, tax, or legal advice. Every family’s situation is unique, and the gifting of money for property purchases can have significant tax and legal implications. It is strongly recommended that all parties involved seek professional advice from qualified tax advisors, legal professionals, and financial planners to fully understand the impact of gifting money and other forms of financial support. The rules and regulations regarding inheritance tax, gifting, and property purchases are subject to change, and professional guidance is essential to ensure compliance with the latest laws.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
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