High house prices, tough lending criteria and sizeable deposit requirements can make it tricky for first time buyers to reach that bottom rung of the property ladder.
But what if Mum and Dad are sitting on a sizeable chunk of equity* that could make that dream first home a reality for the kids?
Jo Jingree from Mortgage Confidence said: “I’m seeing an increasing number of generous parents keen to explore the possibility of releasing some of their own equity to help their children to buy a place. Whether that’s as a result of spending so much time together during lockdown, I wouldn’t like to say!”
What are the equity release options?
There are two main ways to raise funds from your property. The best first step is to speak to an expert who can advise you in light of your specific circumstances. They will be able to take you through the options and the implications for your own financial planning. At Mortgage Confidence, we offer a free 30-minute consultation to help with these sorts of enquiries. But, in general:
This could be an option depending on factors such as your age, how long you have left until retirement, how much equity* there is in your property and if the repayments are affordable for you. A new mortgage would be arranged for an increased amount, and the capital raised could be passed on to your child for their deposit. The new mortgage might with your existing lender or a new one. By remortgaging we may be able to reduce your interest rate which may mean the repayments don’t increase as much as you’d have thought. Depending on your circumstances there may also be the option to remortgage on an interest only basis. At Mortgage Confidence, we have access to mortgage deals from the whole of the market, so we are well placed to find one that best suits your particular circumstances.
A lifetime mortgage is a type of equity release product that allows you to release funds from your home (as a tax free lump sum) by securing a loan against it, rather than perhaps having to downsize your property. There is no obligation to make any repayments in your lifetime. The interest accrues and the total amount owed gets repaid from the sale of the house – either when you die or if you go into full time care. This is a specialist product that we don’t offer at Mortgage Confidence but we can put you in touch with an expert if needs be.
These are the two main options for being able to use your own property to provide your children with a cash injection. If you wanted to provide ongoing support, however, then there are other options such as guarantor or joint mortgages.
Obviously using your own home and/or income to support a child is not a decision to be taken lightly given the implications. We asked local Solicitor Adjoa Djan-Krofa from Pishon Gold for some general advice on how to dot the Is and cross the Ts when it comes to handing over funds.
A Solicitor’s view
This is possibly the most straightforward method. A Solicitor can draw up a Deed of Gift. A formal legal document used to gift money or property to another person without payment being demanded in return. But gifting money can have Inheritance Tax implications, so it is worth speaking to a legal adviser.
You can advance money to your child that they would have received upon your death, this can be interest free or not – your Solicitor will be able to advise you. The sums may be charged against the property as a second charge. A property bought with a mortgage will have a first charge on it in favour of the mortgage lender. When the property is sold, the mortgage is repaid and the charge released. A second charge on a property is often made on a property when the owner takes out a loan with the property as security. The mortgage lender will need to agree to this.
This is a binding legal deed setting out the different contributions or interests in a property. It is particularly relevant if your name will not be on the title deed. This avoids legal costs later as it clearly sets out the different contributions and interests in the property. One of the advantages of having a Trust Deed is that it also makes sure that the money you pass to your child stays with them. For example, if they buy a property with a partner and that relationship subsequently fails then the Trust Deed means that the money you advanced comes back to your child upon sale of the property.
Mortgage and Insurance Adviser, Jo added: “If the Bank of Mum and Dad is an option then right now is a very good time to consider this. You may need to be prepared to act quickly but there is potentially still time to take advantage of the Stamp Duty Holiday that runs until 31st March 2021”
Why not get in touch with Jo to find out more?
*Equity – the value of how much of your house you own. If your mortgage balance is £150,000 and your house is worth £200,000, you have £50,000 equity in the property.