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Property pressures breaking the Bank of Mum and Dad

by Sponsored Content
28th Aug 18 9:24 am

Almost one in five parents who help their children buy a property are sacrificing their own standard of living to pay for it, according to a report by Legal & General and the Centre for Economics and Business Research.

One in ten feel less financially secure, and 4% have postponed retirement, after giving their offspring an average of ยฃ18,000.

But there are four alternatives to shelling out to get your kids a home of their own.

Sarah Coles, personal finance analyst, Hargreaves Lansdown:ย โ€œParents donโ€™t want their children to struggle, so when they face the monumental task of saving up for a home of their own, itโ€™s only natural to feel compelled to help. Itโ€™s why more than one in four of all first homes are bought with at least some cash provided by parents.โ€

โ€œFew people can spare ยฃ18,000 without having a significant impact on their own finances, so weโ€™re seeing alarming numbers of parents sacrificing their own standard of living or postponing retirement as a result. But handing over an enormous lump sum isnโ€™t your only option: there are alternative ways to help your offspring onto the housing ladder.โ€

4 Alternatives

1. Be a guarantor on their mortgage

If your child canโ€™t pay the mortgage, this means youโ€™re guaranteeing that youโ€™ll step in. The stakes can be very high here, because not only could your offspring lose their home if neither of you can pay the mortgage, but if you have used your own home as part of the guarantee, you could lose that too. It means youโ€™ll need to have plans in place for how you would meet the costs if you had to.

2. Look for a specialist mortgage

Lenders have realised thereโ€™s a market for family mortgages, so theyโ€™ve designed products to cash in. You can, for example, get a mortgage where a parent provides a 10% deposit as a loan. If their offspring meets all the remortgage payments in full and in time for the first three years, their parents get the loan back in full โ€“ with interest.

Alternatively you can use a family offset mortgage, which allows other family members to put savings into an account thatโ€™s linked to the mortgage. The savings are offset against the loan, which can be used either to reduce interest payments or shorten the length of the loan. This offers more flexibility for parents, and doesnโ€™t leave them open to a liability if their offspring canโ€™t pay the mortgage.

3. Buy with your child

You can make a lump sum investment in a property, and buy with your offspring. If you buy as tenants in common, you donโ€™t have to own the property 50:50 โ€“ it can reflect what youโ€™re both putting in.ย  You will also have the freedom to leave your share of the property to anyone you want in your will.

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There will be tax implications if you own your own home, because you will pay the 3% stamp duty surcharge on second properties. When you come to sell you will also face capital gains tax on the portion of the property you own as a second property.

You also need to consider the practicalities, and what would happen if they canโ€™t afford mortgage payments on their share of the property, if they want to move house, or if you need to get your money back. If you take this approach, itโ€™s a good idea to get a lawyer to draw up a deed of trust, so itโ€™s clear where you stand.

4. Let them move back in

If your child is struggling to build a deposit while they rent, you can offer them opportunity to move back in and save their rent money instead. Encourage them to open a Lifetime ISA to redirect rental payments into. They can pay in ยฃ4,000 a year, and the government will top it up to ยฃ5,000. If they are buying with a partner or friend, this takes them to 5% of the average price of a first home in a year, so they can use the Help to Buy equity loan scheme from the government toย  cover the rest, and move out for good.

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