Myth Myth 3: Parents need 'spare' cash if they want to help with a mortgage.
Updated: Apr 2, 2019
It's a common question our brokers here at Create get, how can parents help first-time buyers?
High house prices, tough affordability checks and the need to save a large deposit can make it hard for first-time buyers to get a mortgage and buy their first flat or house.
The good news is that there are a range of solutions available if you, as a parent, want to give your child a helping hand on to the property ladder.
Gifting or lending a deposit to your child
Some parents boost their child's deposit by offering them cash towards it. If you're thinking of doing this, there are a couple of things you'll need to be aware of first.
Firstly, your child's mortgage lender may require proof that the money came from you.
If you're gifting the cash, you can usually provide a letter confirming this and stating that it won't need to be paid back.
If you are lending them the money, you'll also need to confirm this as the lender will want to factor repayments in its affordability calculations.
You may also be required to sign a declaration that you have no legal interest in the property, and your child's conveyancer might request bank statements as proof of the cash gift or loan as part of their money laundering checks.
Mortgage options for parents who want to help first-time buyers
If you want to help your child buy a home but don't have enough savings to simply give or lend them the cash, there are several options you can consider.
With guarantor mortgages, the amount your child can borrow is based on your income and assets, as well as theirs.
You’d be guaranteeing to meet any repayments that your child failed to pay, which could be risky, especially if you still have a mortgage on your own home, so its well worth discussing this with a broker.
A joint mortgage considers both your and your child’s income, as well as any money outstanding on your own mortgage.
You'll usually both be named on the mortgage agreement and on the deeds, providing you with some power over any future transactions.
But you would also be liable for keeping up the mortgage repayments and, if you already own a property, you'll probably have to pay the second home stamp duty surcharge.
Joint borrower sole proprietor mortgages
With a joint borrower sole proprietor (JBSP) mortgage, much like a regular joint mortgage, the lender assesses both your and your child's financial circumstances when deciding whether and how much to lend.
The key difference is that only your child is named on the property deeds, meaning they alone own the property.
Both you and your child are responsible for the mortgage repayments, though.
What are the benefits of a joint borrower sole proprietor mortgage?
Your child may be able to borrow a larger amount than if they were applying on their own. Unlike a guarantor mortgage, a JBSP mortgage won't require you to put up additional security, such as your home or savings, to guarantee the loan.
As you won't own any share of the property, you won't have to pay the second home stamp duty surcharge.
JBSP mortgage eligibility
If your child can show that their salary is likely to increase in the future (for example, pay rises written into their contract), a lender may be more likely to approve your application.
Lenders also take the age of the parent into account, considering how old you'll be by the end of the mortgage term, so a discussion with a broker around your plans pre and post retirement would be worthwhile.
If you have a mortgage on your own property, you could consider freeing up cash by remortgaging. This would involve arranging a new mortgage with your existing provider or transferring to another lender.
Your mortgage term could be increased to absorb the additional borrowing, your repayments could rise, or both.
A further advance from your existing lender is another form of loan you could get that would be secured on your home.
Before remortgaging it’s important to consider the impact that increased borrowing would have on your own standard of living and your retirement plans, speak to a broker for expert advice.
Inheritance tax implications
If you're going to give money to your child, you'll need to understand the taxation rules around gifting - as parents handing out large lump sums could face a hefty inheritance tax bill.
Create can refer you to experts in this area who can provide advice tailored to your needs.
Think carefully before securing other debts against your home. As a mortgage is secured against your home or property, it may be repossessed if you do not keep up with repayments on your mortgage.