A hand-up onto the first rung
Today's first-time buyers face even more of a struggle than previous generations. A decade of soaring house prices and ongoing credit crunch makes it feel as though homeownership is slipping out of their reach.
According to industry research the average first-time buyer is now 33 and has saved for around five years for a deposit.
So, it's no surprise that parental help has never been more valuable to young adults. But working out exactly which is the best way to help your child can leave parents facing some tough choices.
Helping with a deposit
A lump sum is the most obvious method of helping your child buy their first home, and generous parents across the UK are raiding their life savings to help their offspring. Half of all first-time buyers are given or loaned cash - and the average handout is around £18,000.
As long as this doesn't jeopardise your own financial security, this can be beneficial for all the family, says Matt Pitcher, an IFA at Towry Law. "People with children of first-time-buyer age tend to be older, so they might be mortgage-free, with spare cash in savings. Giving money to their children as a gift is a great way to help out, and it's also beneficial for inheritance tax purposes."
However, parents need to be aware there are rules surrounding the taxation of gifts. While both parents can gift up to £3,000 a year to their children tax-free, anything in excess of this will be viewed as a potentially exempt transfer and will therefore only become IHT-free if the parent lives for a further seven years.
If you don't want to give the money away outright there are other options. Katie Tucker, technical specialist at John Charcol, says lots of parents help out by taking an equity stake in the property in return for their contribution.
Some lenders, however, will be concerned when parental deposits are given as loans, particularly if it's repayable with interest and there's a specific repayment date. So they often ask for a letter confirming the terms of the agreement and whether the parents expect to have a financial interest in the property.
Buying a property and letting it out to your child and their friends is becoming an increasingly popular option. "This doesn't immediately get your child onto the property ladder, but after a few years, the combined rental income from all the tenants will add up to quite a lump sum to put towards a deposit," explains Tucker.
Buy-to-let won't only bring you a potential long-term profit; it'll also save you forking out monthly rent to line other landlord's pockets. It isn't always straightforward, however, there are tax and ownership issues to consider, warns Pitcher.
"Income tax will be payable on the rental income and capital gains tax on any gain in the property's value," he says. "And if you don't get round to transferring ownership into your child's name quickly enough, the transfer will be treated like a sale and liable for capital gains tax."
If you're not in a position to buy a rental property or provide a lump sum, you might want to chip in with monthly mortgage payments - although this will not assist your child in actually being approved for a mortgage. "Lenders will not take this income into account, unless the parent is named on the mortgage," explains Tucker.
If you want your income to be taken into account, this is classed as a joint mortgage, with both your child's and your name on the deeds, and the amount you will be lent will be based on your combined income - so if you still have a mortgage your borrowing power will be reduced.
Joint mortgages are offered on the basis of 'joint and several liability'. This means that all borrowers are equally liable for repaying the whole loan. If your child stops paying their share, you're still liable to pay the whole amount. As a result, you need to be confident that your child will keep up repayments on their half or know that you could cover them if they find they can't.
There are also issues to consider further down the line. "Joint buying with your child could cause stamp duty and capital gains tax issues later on if your child wants to take the mortgage over," says Katie Tucker. "They will effectively be purchasing half the property from you, which can cause complications."
With guarantor mortgages, only your child will be named on the mortgage - you as the guarantor will not.
The amount your child can borrow will be based on your income not theirs, which is why your guarantee that it can be repaid is needed. Most lenders will require guarantors to support the whole mortgage amount and will assess your income, current mortgage and other financial commitments to determine if you can afford to guarantee the mortgage. If you're mortgage-free, it's a feasible option.
Some lenders require the guarantor to be liable for a portion of the mortgage. "The way this normally works is that the parent is liable for around 30% of the loan, if the child can show evidence of being able to afford the other 70%," adds Tucker.
Pitcher warns parents to think carefully about taking on a guarantor mortgage. "When the amount borrowed is based on your income rather than your child's, they may be tempted to take on too big a mortgage for their salary," he says. "The last thing any parent wants, when they're mortgage-free themselves - or close to it - is to be lumbered with another huge debt if their child can't cope."
Can you afford to help?
While it's great if you are able to help your child buy their first home, your assistance should never be at the expense of your own financial security. And although many parents are willing to remortgage their own properties to raise a deposit, it's not recommended.
Don't be too quick to whip out the cheque book.
"Parents should be encouraging their children to save for themselves," says Francis Klonowski, partner at financial planning consultants Klonowski and Co in Leeds.
If you aren't able to help, don't feel guilty.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
These are mortgages to help first-time buyers get on the housing ladder whereby parents or relations stand as security for the loan by guaranteeing to pay the mortgage in the event of the purchaser failing to make the repayments. The guarantor mortgage is taken out in the purchaser’s name, but the guarantor’s income is used to guarantee the mortgage borrowing but this enables the first-time buyer to borrow more money than his or her own income as the guarantor’s income (less any other financial commitments) is also taken into account.