How Parents Can Help Children With Their Mortgage
With house prices having continued to soar and the debts that students now face, many young people are left with little chance of buying their own home. Although lenders are continually looking at ways they can help first-time buyers with new products, it is often to their parents that they turn for help.
There are various ways in which parents may be able to help their children.
The simplest way is for parents to lend some money to their child to help with the deposit. To this about a quarter of parents use investments or savings; others do it indirectly by letting a child live at home longer while they save for a deposit.
There is certainly a benefit to having a deposit – as large as possible. This will help to reduce monthly mortgage repayments and help get the best interest rate possible. For parents or grandparents giving the money it also has the projected benefit of reducing the tax burden of inheritance tax, as long as the provider lives for seven years after the giving the money.
A second option is to remortgage. If parents don’t have or don’t wish to use investments or savings, then they might choose to remortgage to release some money from the equity in their home. This has been a popular way of raising capital in the last few years, and could be used to help children with their deposit. It is usually backed by an agreement by the child to repay the interest to parents at a reasonable interest rate.
Lenders usually allow parents to act as guarantor for a child’s mortgage. The parents will have to have enough income to cover the debt. Portions of the debt to be covered vary between lenders, from as little as 25% up to the full amount. It means that if a child defaults on any payments, the lender will come to the parents for the money. The guarantee is indefinite, but it is hoped that eventually the child will free the parents from it by taking over the full mortgage debt themselves.
Another way parents can help children without using their cash for ever could consider a family offset mortgage. Yorkshire and Newcastle building societies offer these. These type of mortgages enable a parent to use savings to offset against the child’s mortgage, thereby paying interest only on the balance. Parents maintain control of their cash savings and can therefore take them back at any time if, for example, their relationship with the child should take a downturn.
If parents can’t help children get on the property ladder then there are some other options. Examples are professional and graduate mortgages for the eligible; interest-only mortgage to start, changing to repayment mortgage later; a 100% mortgage meaning no deposit, but fees and rates are higher; use a longer mortgage term, possibly as long as 40 years, bringing down monthly repayments, but increasing the total; buy with friends: lenders may allow this, but it is important to plan for the future when you will want to go your separate ways.
Tom Smith
26th July 2007
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