A first time buyer needs at least £16,000 for a deposit. That’s why it’s been a growing norm for the past few years for parents to help out their children buy a house. While the idea is simple enough to understand, there are tons of hidden consequences in these setups.
For those who are considering this arrangement, here’s a short guide through the process:
Gifting vs Loaning
Handing over the amount as a gift is the easiest and simplest way for parents to help out theirs kids who are first time home buyers.
To make things clear, you count something as a gift when the giver does not receive anything in exchange for the item or amount given. In this case where the gift is in the form of money, parents shouldn’t expect or demand that they receive the value back or get something in return for it.
Keep in mind that the amount you receive may be subject to inheritance tax if parents die within 7 years upon giving a gift.
Loaning, on the other hand, is another easy and simple way for parents to assist their children when it comes to buying a house. The difference between gifting and loaning is that in the latter, parents require a repayment for the money they lent to their children.
Remember that the payments to the loan may be charged an income tax, so look out for these hidden costs!
Taking out a joint mortgage is another option for parent-children tandems. Under this setup, both parents and children will be named as the owners in the deed as well as be equally responsible for the first-time buyer mortgage repayments.
While this strategy will help you get a bigger mortgage, parents might be exposed to additional tax charges if they already own a home of their own. The taxman will see the second house as the parent’s second home and, hence, be charged with capital gains tax when the property is sold.
Becoming a guarantor
Parents could also act as guarantor for their children if they are homeowners with a decent amount of equity in their property.
Guarantors to a mortgage are the ones who are forced to pay the unpaid amount once all the original debtor’s assets are insufficient to cover the debt. So in case children default on mortgage payments, the banks will hound the parents to make the payments. In worse case scenarios, they may even be forced out of their house if they also don’t have the cash to pay for the unpaid amount. Yikes!
So if you are a parent looking to help your children buy their first home, it is very important that you know the risks involved. If you don’t have a stable income to afford the monthly amount that your children will be paying for their mortgage, it’s not advisable to be a guarantor (and it’s something I really won’t recommend especially if the house you own is already fully paid).
Personally, I helped my daughter raise money for their deposit. The gift I gave her and her husband allowed them to deposit more than 10% of the property’s value. Banks like it when you are able to pay more of the value of the house. They deem the buyer as less risk, and the terms become more favourable for your children.
I hope these tips helped you discover the right method on how your family can help each other out in the buying process. See you again in the next blog post!Tags: buy a house, buying a house, first time buyer, first time buyer mortgage, first time home buyers