Many parents want to help their children get onto the property ladder, with sky-high rents and steep house prices making saving a deposit particularly challenging for younger generations.
The Bank of Mum and Dad usually gives around £6 billion a year towards helping their children buy property, research by Legal & General shows, and there are plenty of different ways that parents can help. For example, one in five (21%) retirees have gifted their child money for a deposit, while 6% have loaned them money, and a further 2% have acted as guarantors, according to Interactive Investor’s latest Great British Retirement Survey.
The average amount given towards a deposit is a hefty £18,400, according to the survey, but it’s not only those with high incomes who are financially helping their children. Nearly one in five (17%) parents with household income of less than £30,000 have given children an average £15,500.
Here, we look at some of your options for gifting or lending money to your children to help them buy a property, and some of the pros and cons of each.
If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
Equity release
If you’re aged 55 or over and want to give your children a lump sum to put towards a property deposit, you could consider unlocking some of the wealth tied up in your own home by taking out an equity release plan.
Using equity release means you don’t have to dip into savings and you could receive a lump sum to pass on, while continuing to remain in your home. You eventually pay back any money released through equity release when you die, or move into long-term care. Read more in our articles Equity release – what is it and how does it work? and Can I take money out of my property to give to my children?
You can use our Lifetime Mortgage Calculator to work out the costs of equity release, and find more information about this in our article How much does equity release cost? If you’re looking to speak to someone, you can book a free, no-obligation callback with a Rest Less Mortgages equity release specialist**. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
Pros: You don’t need to find the money to pay monthly repayments on an equity release plan as you would with a standard mortgage. Instead, the interest you owe rolls up over the years, and only has to be repaid when you move into long-term care or pass away. You remain in your own home and can use the money from equity release however you wish, so you may split it between your child’s property deposit and other outgoings, for example.
Cons: Equity release costs can be really high because you’re not repaying any of the interest on the money you’ve borrowed, which means it is compounded over time. Other drawbacks include that your family may receive a smaller inheritance than they were expecting, and equity release can also impact on your entitlement to certain means-tested benefits. Read more in our article Equity release – what are the risks?
Using savings
Perhaps the simplest way for parents to give money to their child to help them onto the property ladder is by handing over some of their savings to put towards the purchase. However, the risk is that this could leave you short of money when you need it, for example if you need to pay for an unexpected bill or to cover day-to-day living costs as essential bills rise. Bear in mind, too, that interest rates on savings accounts are currently the highest they’ve been in decades, so it’s important to consider the loss of interest alongside access to your money. Read more in our article Five ways to boost your savings returns.
Pros: A simple way to access money to hand over to your child, without having to apply for a financial product or sign up to a particular loan or mortgage agreement.
Cons: You’ll lose access to your money, which could cause problems if you need it in the future. You’ll also miss out on interest on your cash savings, or potential investment returns if you take money out of the stock market. If you are cashing in investments, there’s also the risk of taking money out when markets are low, which would effectively turn paper losses into real ones.
Taking tax-free pension cash
From the age of 55, you can usually access to money in your defined contribution pension, and 25% of this can be taken as a tax-free lump sum. Some parents are cashing in pension pots and using the tax-free cash to help their children out with a deposit. By doing so, you will have less in your pot to provide for your own retirement plans as rising life expectancy means that pension pots must last longer than ever. Also, while it may seem a sensible use of your tax-free cash, it’s often not the best way to help your child financially, and it’s vital to consider the inheritance tax (IHT) implications of taking money out, as any pensions you have on death can usually be passed on free from IHT.
Find out more about the implications of taking money from your pension in our articles Should I take my tax-free pension cash at 55? and How much tax will I pay when I withdraw my pension?
Pensions can be complicated, so if you’re not sure how to proceed, it’s worth seeking out professional advice. If you’re 50 or over and have a defined contribution pension, you can get free guidance on the options available to you from the Government’s Pension Wise service. However, if you want personal recommendations or advice about your specific circumstances, you’ll need to seek professional financial advice. You can find a local financial advisor on VouchedFor* or Unbiased*, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.
If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.
The review is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
Pros: This may be a simple way to access money to give to your children from age 55. It could be a good solution, provided you’re aware of the potential impact on your retirement income, and tax implications.
Cons: You’ll have less in your pension to fund your retirement. Pensions aren’t subject to inheritance tax, but if you give money from your pot to your child you could find that this is subject to IHT if you don’t live for more than seven years after giving the money away.
Lending a deposit
If you don’t want to hand over some or all of your savings, then lending a deposit is another option you might want to consider. You can set the terms of repayment, provided you trust that you will get the money back in the future from your child. Bear in mind, though, that when they apply for a mortgage their lender will usually want to know about any loans which make up some of theira deposit, and this may affect whether they offer your child a mortgage. The lender may also insist that the money is repaid when the property is sold, rather than paid back in installments, as this could affect your child’s borrowing potential.
Pros: You won’t lose your money, as it’ll eventually be repaid provided your child sticks to the terms agreed. Lending a deposit is also potentially another simple option as it doesn’t require signing up to a financial product or agreement.
Cons: You may not get your money back if your child is struggling financially and unable to repay you. Lending a deposit could affect how much your child can borrow, depending on the lender’s assessment criteria.
Guarantor mortgages
With a guarantor mortgage, a parent or grandparent signs up to cover the mortgage repayments if the child fails to meet these. Guarantor mortgages used to be a common way for parents to help their child onto the property ladder, but they aren’t hugely popular these days given there are other options available to help those with small deposits. You’ll typically need to provide some sort of security as a guarantor, such as your own home or savings that could be seized if repayments aren’t met.
Pros: Your child can potentially apply for a bigger mortgage if they have your backing, and therefore may be able to purchase a better property than they would otherwise have been able to.
Cons: You could be putting your own home at risk if your child fails to make repayments or defaults on the terms of their mortgage, as you may be liable for the whole mortgage balance.
Joint mortgage
Some lenders will allow the mortgage to be held in joint names, which means that your income as well as your child’s can be considered in the mortgage application, potentially increasing your child’s borrowing potential. However, make sure only their name is on the property deeds if you already own your own home so you don’t end up being liable for the Stamp Duty Surcharge on second homes. You can find out more about this in our guide Stamp Duty explained.
You may also have to demonstrate that the mortgage payments will be affordable for you into retirement, depending on your age and the term of the mortgage. Remember that if you have a mortgage on your own home, this will be taken into account by the lender, which could reduce the size of the loan you and your child can apply for.
If you aren’t sure which mortgage or remortgage deals you and your child will be eligible for, it may be worth speaking to a professional mortgage advisor to find out which options might be available to you. You can read more about how a mortgage advisor might be able to help you in our guide Should I get advice on my mortgage?
If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
Pros: A joint mortgage potentially increases the amount that your child can borrow to buy, and may enable them to purchase a better property than they would have otherwise been able to.
Cons: Be careful of tax implications – the property could be considered a second home, which results in significantly higher tax charges. You’ll be jointly responsible for the mortgage payments.
Remortgaging
You usually remortgage when you come to the end of your current deal and you want to ensure you keep your mortgage repayments as low as possible. However, you may also choose to remortgage to release money tied up in the value of your home to pass on to your children. If you’ve paid off the majority of your mortgage, and you’ve plenty of equity in your property, this could be an option that’s worth considering.
You can work out how much of your property you own by taking away the amount of mortgage you have outstanding from your property’s value. This will give you what’s known as the loan-to-value (LTV). For example, if the value of your mortgage has reduced from £300,000 to £200,000 over time on a home that’s now worth £400,000, your LTV will have reduced from 75% to 50%. You could remortgage to and release some of this equity.
Read more in our guides Four things to consider when remortgaging and When is the best time to remortgage? If you think remortgaging could be a good option for you, it’s almost always a good first step to see what rates are available in the market. You can use our mortgage service to compare remortgage deals from the whole of the market and find out how much you might be able to save. If you are nervous about switching lenders, it is still worth filtering for deals from your existing lender so you can see how much you could save from transferring to a new scheme with them. Our mortgage service allows you to compare the best rates from both your current lender and the wider market, quickly and easily.
Pros: If you don’t want to move or downsize, this could be a good option to help your child buy a home. It also enables you to keep hold of your savings rather than gift these, and means you can avoid signing up to a potentially more complicated mortgage arrangement with your child.
Cons: You might face a penalty for remortgaging if you do so before your existing mortgage deal has come to an end. Also, if you’re releasing equity you’re also increasing the size of your mortgage, and your monthly repayments. If you release a large amount, your LTV will increase, which reduces your chances of securing the best mortgage rates on the market.
Family offset mortgages
Another option is a ‘family offset mortgage’, which enables a parent or grandparent to put money into a savings account that’s linked to the child’s mortgage. The amount of savings you have is deducted from the mortgage balance, which effectively reduces the child’s repayments, but you can still access these savings in future. Your savings also provide the mortgage lender with some of the security required to proceed with the purchase.
An offset mortgage essentially works by reducing the mortgage’s loan-to-value (LTV). For example, let’s say your child needed a mortgage of £200,000 to buy a property. If you have £50,000 in a savings account, this could be used to reduce the amount that mortgage interest is charged on to £150,000. Read more in our article What is an offset mortgage?
Pros: This option can be less of a financial burden than making a gift, for example, if you don’t want to lose access to money that you may need in the future. Meanwhile, your child benefits from lower mortgage repayments.
Cons: You won’t get any interest on your savings, and there aren’t many family offset mortgages out there to choose from. Depending on the mortgage terms, you should be able to access some of your savings if needed, although remember that doing so will increase your child’s repayments.
Buying a property outright
If you’ve got the money to do so, you could buy a property for your child yourself, either outright or by releasing equity on your own home to free up the cash. Bear in mind that if you need to borrow to buy your child a home, getting a mortgage on a property for your child to live in can be tricky.
The majority of buy to let mortgages won’t allow you to let the property to your child, as lenders are anxious that you may not charge enough in rent to cover the mortgage, or chase missed payments. You may also have to pay the Stamp Duty Surcharge on a second property if you already own a home. Read more about the implications in our article Should I buy a property for my student child?
Pros: If you’ve the money to buy your child a home, this gives them a leg-up onto the property ladder without worrying about saving for a deposit or paying a mortgage. It could enable them to focus on other financial goals instead.
Cons: Letting a property to your child, if you plan to do so, can be complicated if you have a mortgage as lenders won’t typically allow it. You may need to pay the Stamp Duty Surcharge on a second home, which can be a substantial amount.
Financial gifts and inheritance tax
If you’re planning to give a large amount away to your children to help them with a property deposit, bear in mind it could be subject to inheritance tax (IHT) if you die within seven years of giving the money away.
Your estate is subject to inheritance tax at 40% on the value of your estate above £325,000 when you die, or £650,000 if you’re married. However, if you think your estate will be liable to IHT, you may be able to reduce your liability by making gifts to your children. Provided you live for at least seven years after making the gift, no IHT is payable.
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