In today's property market, where the average house price in the East of England surpasses £310,000, young individuals and families are facing the daunting challenge of stepping onto the property ladder. With lenders often requiring substantial deposits, it's no surprise that many aspiring homeowners are turning to the Bank of Mum and Dad for support.
At Mortgage321, we receive numerous enquiries from parents eager to assist their children in purchasing their first home. In this comprehensive guide, we'll explore various options available to parents looking to help their children achieve homeownership.
1. Help with a Deposit
The Spring Budget of 2021 brought good news for homebuyers across the board, including first-time buyers. The government introduced a new 95% mortgage guarantee scheme designed to enhance access to mortgages with a loan-to-value (LTV) ratio of 95%. This development means that homebuyers, including your children, can access mortgages without the need for prohibitively large deposits, provided the property's value falls below £600,000 (subject to affordability criteria).
As a parent, you can assist your child in raising the necessary deposit by considering the following options:
A. Bank of Mum and Dad Loan: If you choose to loan money to your children, you can establish the terms of the loan, including whether or not to charge interest and the repayment schedule. To ensure clarity and avoid potential disagreements, it's advisable to draft a formal promissory note. If your child anticipates difficulty repaying your loan alongside their mortgage payments, you can create a 'declaration of trust' with the assistance of a solicitor, specifying that the money must be repaid when the property is sold.
B. Release Equity from Your Home: If most of your assets are tied up in your property, you can explore the option of securing a loan against your home to provide the deposit. It's essential to be aware that failing to meet loan repayments could put your home at risk.
Another possibility is opting for an equity release scheme like a lifetime mortgage, enabling you to access the equity in your home early, potentially when your children need it most. With a wide range of equity release options available, we recommend consulting with a whole-of-market mortgage adviser, such as Mortgage321, to determine the best choice for your current and future financial needs.
C. If You Prefer Not to Borrow: If you're hesitant to take on borrowing to aid your child's home purchase, you have alternative options:
Act as a Guarantor: You can act as a guarantor on your child's mortgage, enhancing their affordability by considering your income alongside theirs.
Joint Mortgage: Another option is entering into a joint mortgage on the property, where you co-own a share of the home. However, be mindful that these options could make you liable for monthly payments if your child encounters difficulties, so careful consideration is essential.
2. Determining the Best Option
As with any financial decision, it's crucial to assess risks and have open discussions with your child from the outset. Consider scenarios such as a partner moving in or changes in their work circumstances. Can your child manage their finances responsibly? Remember that worst-case scenarios could potentially jeopardise your home or leave you financially strained in the event of unforeseen expenditures or income changes.
At Mortgage321, we understand your desire to support your child's journey onto the property ladder. We're here to help you explore your options and make well-informed decisions that benefit everyone involved in this exciting step towards homeownership.
Contact us today on 01255 440142, and let's discuss how we can make your child's homeownership dreams a reality.