Many young adults find themselves struggling to make their first step onto the property ladder. With house prices and mortgage rates at an all-time high, it’s no wonder the “Bank of Mum and Dad” is increasingly becoming a crucial resource for aspiring homeowners. If you’re considering lending a financial hand to your children, understanding the available options and their implications is essential.
Research by the Institute for Fiscal Studies reveals that almost half of homebuyers aged 20 to 29 have received financial help from their parents, with the average contribution amounting to £25,000. This substantial input reflects the challenging market conditions that have priced many out of homeownership without significant external help.
Maximising Benefits and Minimising Taxes
One effective way to support your child while managing your tax liability is through gifting. Parents can each give £3,000 annually, which immediately falls outside of their estate for inheritance tax purposes. If last year’s allowance wasn’t used, a couple could jointly gift up to £12,000 without impacting their estate.
For larger sums, the rule is straightforward: survive seven years after making the gift, and it won’t count towards your estate for inheritance tax purposes, reducing your potential tax liability significantly.
Junior ISAs
For parents of younger children, Junior ISAs offer a tax-efficient way to save. With a limit of £9,000 per year, these accounts allow investments to grow tax-free, setting up a solid financial foundation for future homeownership.
Remortgaging
Many parents remortgage their homes to release equity, providing a lump sum to help their child purchase a home. However, this increases monthly payments and potentially extends the mortgage term, which could impact retirement plans and financial stability.
Downsizing
Selling a larger family home to downsize can free up capital to assist your child, although it’s crucial to consider the costs associated with moving and the potential reduction in living space.
Equity Release
Although less common, some opt for equity release schemes like lifetime mortgages. These loans, secured against your home, allow you to borrow money that is repayable upon death or when moving out, though they can significantly increase debt over time due to compound interest.
Pension Withdrawals
Parents over 55 can access their pension to help their children, with up to 25% withdrawable tax-free. However, drawing from a pension can affect future retirement income and potentially push you into a higher tax bracket.
Lending and Co-buying
Direct Lending
Lending money directly to your child can be tricky, as mortgage lenders often require confirmation that the money is a gift, not a loan, to avoid affecting loan affordability assessments.
Joint Ownership
Buying a property with your child as ‘tenants in common’ allows for specified ownership shares and can be a smart investment strategy. However, it involves potential stamp duty surcharges and capital gains tax on resale.
Guarantor Mortgages
Acting as a guarantor lets you support your child’s mortgage application without direct monetary gifts. This commitment does mean you’ll need to cover payments if your child cannot, emphasising the need for a solid financial backup plan.
The Risks and Rewards
All these financial strategies come with inherent risks and costs. It’s crucial to thoroughly understand these commitments and consider whether the financial strain is manageable within your long-term budget.
Government Assistance
For those wary of personal financial risks, government schemes like the Help to Buy ISA, Lifetime ISA, equity loans, and shared ownership offer alternative ways to help first-time buyers achieve homeownership.
While the desire to help your children is natural, it’s vital to balance this with the sustainability of your financial health. Consider all options and choose wisely to ensure mutual benefits without compromising your financial future.