Supporting Your Children in Climbing the Property Ladder: a Comprehensive Blog for Parents and Grandparents

Written on 8 May 2024 by Nicholas Mendes

parents with child on sofa surrounded by moving boxes

Entering the housing market can be a formidable challenge for first-time buyers, particularly amidst rising property prices and stringent mortgage requirements. As a parent or grandparent, you might be wondering how you can assist your children or grandchildren in securing their first home. Here’s a detailed blog to help you understand your options and strategies for providing this significant support.

Understand the Costs of Local Housing

Before diving into the financial support options, it’s essential to gauge the housing market in your child's area of interest and discuss this with them. Knowing the average costs of homes helps in planning the financial assistance needed, whether it's contributing to the deposit or the ongoing financial commitments they'll face. Websites like Rightmove or Zoopla can provide information on current market trends and pricing.

Work Out Monthly Spending and Saving Opportunities

A crucial step in preparing for a mortgage application is understanding and managing one's finances. Sit down with your children and help them review their monthly spending. Look for areas where they can cut back to increase their savings rate. This might include minimising dining out, reducing entertainment expenses, or switching to more cost-effective service providers.

Ways to Help First-Time Buyers Purchase a Home

There are several strategies parents can adopt to aid their children in purchasing a home:

LISA (Lifetime ISA): you can encourage your child to sign up for and regularly contribute to a LISA. In the UK, a Lifetime ISA offers a great way to save for a first home. Up to £4,000 can be saved each year, and the Government adds a 25% bonus to the savings, up to a maximum of £1,000 annually. These funds can be used to purchase a first home worth up to £450,000, so it’s worth it
Gift a deposit: you can gift money towards the deposit. This is one of the simplest ways for parents to help their kids onto the property ladder. This direct financial support can significantly lessen the LTV (loan-to-value), potentially securing more favourable mortgage terms. It’s important to consider the potential implications for Inheritance Tax when gifting large amounts of funds and to speak with a financial advisor to ensure that any gift maximises tax benefits – at John Charcol we can help support you through our partner Trinity Wealth.
Regular savings contributions: setting up a savings account specifically for your child's future home and contributing money regularly can help grow the necessary funds over time
Joint ownership: consider if buying a property jointly with a friend or another family member such as yourself is a viable option for your child. This can make properties more affordable by pooling resources, but it of course requires clear agreements and legal advice to manage ownership shares and future contingencies
Joint borrower sole proprietor mortgage: this less-known financial product has more or less taken the place of the guarantor mortgage. It allows parents to include their income in the mortgage assessment without being co-owners of the property, as they would be if they were joint owners. It helps increase the amount your child can borrow as the affordability is worked out using the income of all mortgage applicants
Equity Release: for parents whose wealth is tied up in their own homes, equity release offers a way to unlock this value without moving. This arrangement allows homeowners to borrow against the value of their home, receiving funds as a lump sum or in smaller amounts, which can then be used to help their children buy property. However, this option requires careful consideration due to its impact on the inheritance you may wish to leave and the accrual of interest on the released equity
Using your property or savings as security without gifting them or purchasing property in your name: there are a few different products on the market that can enable you to help your child afford a mortgage without outright gifting them funds. I break these down in more detail below

Family Offset Mortgages

A family offset mortgage allows family members, usually parents or grandparents, to use their savings to help reduce the interest costs of a mortgage taken out by their child or grandchild. Instead of gifting cash directly, the savings are held in an account linked to the mortgage. The money in this account is then "offset" against the mortgage balance, meaning the buyer only pays interest on the difference

Key Benefits:

Reduce interest costs: by offsetting the mortgage amount, you can significantly reduce the monthly interest your child has to pay, making their repayments more affordable
Savings stay intact: your savings are not spent but instead held in an account, usually until a significant portion of the mortgage is paid off, or a set period has elapsed. This means you still retain control over your funds and can receive them back eventually, often with interest
Flexibility: this method can be more flexible than traditional gifting, as it allows the supporter to potentially reclaim their funds if their circumstances change

Family Deposit Mortgages

A family deposit mortgage involves a family member, typically a parent or grandparent, helping raise a deposit for the mortgage by providing cash or equity as security. This can be a direct cash contribution or a no interest charge taken out against the family member’s property if they have substantial equity.

Key Benefits:

Increased buying power: your contribution can mean the difference between securing a mortgage or not, as it directly increases the size of the deposit, improving LTV ratios and potentially securing better mortgage rates
Help without liquid assets: if you don't have cash to hand but have equity in your own property, you can still assist without needing to liquidate your assets
Potential for return: depending on the agreement, once the homeowner refinances or the property value increases sufficiently, there may be an opportunity to repay the contribution or have the charge removed from the family member’s property

How to Choose the Right Option

When deciding whether a family offset or deposit mortgage is the best way to help your child or grandchild, consider the following:

Financial stability: ensure that your financial assistance won't jeopardise your own financial security, especially considering retirement needs
Relationship dynamics: clear communication and written agreements are crucial to avoid future misunderstandings over money
Long-term implications: understand how these agreements might affect your and your child's financial future, including credit ratings and potential tax implications

Conclusion

Helping your children onto the property ladder is more feasible than many think, with multiple strategies to fit different financial situations and goals. It’s not only about giving money but also about providing guidance, education on personal finance, and support through the mortgage application process. By exploring these options, you can make a significant difference in your children's ability to own their home and secure their financial future.

Always consult with one of our experience mortgage brokers to explore these options thoroughly and ensure they align with your family's needs and goals.