Buying a first home used to signal the start of a new era of independence, a turning point into adulthood.
But the astronomical rise in London prices has put paid to that. Home ownership is at its lowest level for 25 years. Not only are people buying their first home later – the average age has risen to 31, according to Halifax – but it frequently involves a heavy reliance on mum or dad.
The average UK house price is now £298,000, and in London it’s £600,000 – a rise of 11 per cent on last year.
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Those are huge sums considering lenders will only offer up to 5.5 times an individual’s salary. This means even more emphasis on having a large deposit.
First time buyers in the capital need an average £91,409 deposit, Halifax data shows. That’s three times the national average of £32,927 – and has risen 13 per cent from 2014.
Unsurprisingly, well over a third of first-time buyers accepted help from parents, research from Barclays Bank shows. It said 20 per cent of those hand-outs were considered non-repayable, which puts a “significant levy” on parents’ finances.
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Mum and dad will give children £5bn this year alone to help them onto the housing ladder. That’s the equivalent of £17,500 per family, according to research from insurer Legal & General and think tank CEBR.
1. LUMP SUM
People who do have tens of thousands stashed away can simply hand this over to their children for a deposit when the time comes. There are two considerations to take into account here. First, the mortgage lender will need to know where the money has come from and will need confirmation that it is a gift. If there are any strings attached – such as needing to be repaid by a certain time, or with interest – the lender will want to know as this affects the overall affordability of the home for your children.
“They often just need to ask their parent to sign a ‘gift of deposit’ form for the new lender and confirm they have no rights to the property that’s being purchased. Therefore it’s very straight forward,” says Rebecca Robertson, financial planner at Evolution for Women.
Inheritance tax also needs to be taken into account, as there are strict rules over the size of monetary gifts that can be given during one’s lifetime. It also depends on how long you live after handing over the money – less than seven years and the deposit may be liable to tax when you die.
2. SAVE A DEPOSIT FOR THEM
Parents can save up to £4,080 per year on behalf of each child under 18 through a Junior Isa. Patel suggests those who can afford it should use child benefit to top-up their savings, so as much is put away as possible. “I would suggest most parents should invest in equities because, over the long term, returns are much greater than interest on cash,” he adds.
For older children, it’s also possible to put a maximum of £200 a month into a Help to Buy Isa. The child must open the account themselves, but parents can give them money to put in it. When preparing to purchase a home, instruct the solicitor to apply for the government bonus of the £50 for each £200 saved. “In under five years they’ll have £15,000 for a deposit – including £3,000 of government money,” says Karen Barrett, chief executive of Unbiased.co.uk.
Over 20 banks and building societies are offering these Isas and people have until 2030 to claim the government top-up.
3. GUARANTOR MORTGAGES
“Once funds have been accumulated for a deposit, then the issue facing many potential homebuyers is their income being insufficient to get a large enough mortgage,” says financial planner Minesh Patel of EA Financial Planning.
Guarantor mortgages get around this. The parent’s home is put up as collateral against a purchase of a new home.
This lowers the risk for the lender so means they’re much more generous with how much they’ll loan. Aldermore, for example, is offering up to 100 per cent of the property’s value.
“A guarantor mortgage means that a parent’s income is combined with their child’s on the mortgage application to raise the multiple of how much can be borrowed,” explains Patel. For example, if both father and son earn £30,000 each, and a lender will offer four times their combined salary, then they could apply together to borrow £240,000.
These mortgages still remain niche, partly because a “healthy” deposit is often required on top of the other criteria.
There is also risk. If the child falls behind on mortgage payments, the parent’s home could be seized.
Guarantor mortgages also tie up the fortunes of the parents with their child, and there’s no guarantee the youngster will be able to extricate themselves from the joint mortgage and set up on their own. “I would recommend where possible to keep [things] separate,” says Nick Green, mortgage broker at Alternative Estates.
“Guarantor mortgages are more complicated and criteria is strict. You have to consider the term of the mortgage taking into consideration the parents age, and also all parties will be financially connected.”
4. INNOVATIVE MORTGAGES
There are a smattering of alternative mortgages now on the market, and lenders are likely to come out with more innovative products in future.
Family offset mortgages are an interesting area. They allow the parent to put up a lump sum as a deposit for their child’s house, but rather than lose the money entirely, the lender puts it in a bank account.
After a period of time, say 10 years, it’s returned to the parents. That’s providing the homeowner hasn’t defaulted on the loan. With some lenders, including Barclays and Lloyds, the cash earns interest.
5. EQUITY RELEASE
Those over 55 who’ve paid off their mortgages could also consider taking cash out of their property, through so-called “equity release”.
The most common way to do this is through a lifetime mortgage. This is where a homeowner takes out a loan of up to 60 per cent of the value of the property they’ve already paid for.
Lenders hand over a lump sum (some allow the money to be taken in increments), and usually you don’t have to make any repayments on the mortgage. Instead the interest on the loan accumulates, and when you later downsize or pass away, the proceeds from the home sale are used to pay off the mortgage. “It suits those with significant equity who will eventually downsize,” says Patel.
This article appears in City A.M's Money magazine, out on 14 July.