6 Hints & tips to help your children get onto the housing ladder

A recent survey from the housing charity Shelter, has showed just how hard it is for many would-be first timebuyers to get onto the housing ladder.

The full survey results can be found by clicking here.

The main findings though were shocking:

• The average purchase price paid by a first time buyer in England is £139,920
• The average deposit put down is £27,894, equivalent to 20% of the purchase price
• It will take a couple an average of 6 ½ years to save the deposit
• A couple with a child will take 12 years
• A single buyer will need 14 years

Since the last housing bubble burst and the subsequent credit crunch, it has been harder than ever for first time buyers to get onto the housing ladder, with the main impediment being the size of deposit needed.

This is where generous parents and grandparents often step into the breach, helping out their children and grandchildren when most needed.

So, how can you help your children or grandchildren?

1. Start saving for their first house deposit

If you have enough time you could start investing each month, initially in an ISA (Individual Savings Account) for added tax-efficiency, to give a lump sum of money which can then be used as a house deposit.
How much do you need to save? Well, that all depends on the purchase price and of course house price inflation between now and when your child buys.

The figures from Shelter show the average deposit for first time buyers is £28,000, but of course that will increase in line with house prices. We’ve put together a handy table to show you how much you need to put aside each month, to fund a typical deposit, assuming house prices grow at 2.5% per year.

[table id=1265 /]

*Assumes house price inflation of 2.5% per year

**This assumes growth on the investments of 5% per year after charges

Our savings calculator allows you to work out exactly how much you need to save for your children. Click here to use the calculator and select ‘Saving for a goal calculator’.

2. Use your existing savings or investments

If the child is older, you might not have enough time to make saving for the deposit a viable option, you therefore will need to consider using existing capital.

This route will clearly reduce the amount of money available to you, so think carefully before making the decision to lend or gift such a large lump sum. How will it affect your retirement? Will it reduce your income? Can you afford to give the money away? All of these things and more should be considered.

If you do decide to go ahead then ideally you should take the money from the least tax-efficient homes as possible; which means where possible leaving plans such as ISAs, Premium Bonds, and NS&I Index Linked Certificates untouched.

3. Loan or gift?

You need to decide whether the lump sum of money you are handing over is a gift or a loan.

If you are prepared to see it as a gift then this may well help to reduce any potential Inheritance Tax liability on your death; providing of course you survive for seven years. However, take care to ensure that you are left with sufficient money for your own needs, particularly if you are close to retirement. It also is worth considering whether other children or grandchildren will expect the same generous gift when they come to buy a house!

If you decide you don’t want to give away such a large amount of money, but prefer to make it a loan, we’d recommend you formalise the arrangement with a simple agreement.

You should be aware though, that while many mortgage lenders are happy to accept a gift as deposit, the use of a loan could seriously narrow down the choice of lenders prepared to consider the application.

4. Guarantor the mortgage

For children struggling to get onto the housing ladder this was always the traditional way in which their parents could help out.

The mortgage lender would generally want to be convinced that the child will be able to afford the mortgage themselves, on standard income multiples, within a relatively short period. This made it an ideal option for graduates and others, who had reasonable expectations of significant wage rises in the short term.

Of course this route isn’t risk free; if the child defaults on payments the lender will look to the guarantor, generally the parents, to make good the payments.

5. Alternative mortgage help

As the mortgage market has emerged from the credit crunch some lenders have brought innovative new products to the market to help first time buyers.

One example of this innovative thinking it the Family Springboard Mortgage from Barclays, where the first time buyer only needs to put down a 5% deposit, providing their ‘helper’ is willing to put 10% of the purchase price in a Barclays deposit account, for a maximum of three years. At the end of the three years the ‘helper’ can access the savings, plus interest, providing that the borrower has kept up mortgage repayments.

Although the ‘helper’ isn’t acting as guarantor, if the borrower misses payments or has their property repossessed, the money the ‘helper’ has put in the savings account is as risk.

Another option is the Parent Assisted Mortgage from the Bath Building Society.  This route can provide a mortgage to first time buyers of up to 100% of the purchase price with the building society taking  a collateral charge over the parents’ home for any sum above 75% loan to value. So, if a child wants to buy a £200,000 property on 100% loan, then a £50,000 charge would be taken over parental home. The benefit of this scheme is that it does not require parents to find or lock up a cash sum to assist their children. This option gets round the critical problem that many young people have right now: they are earning reasonable incomes but saving up for a large deposit isn’t really practical.

6. Help at University?

Traditionally parents have helped their children buy their first house after they have finished university. But more and more parents are turning their back on expensive and often poor quality student ‘digs’ and helping their children buy a home while they are still studying.

The Bath Building Society is one such lender who offers a mortgage scheme specifically to cater for students. Their Buy for Uni Mortgage product allows the student, in conjunction with their parent, to borrow up to 100% of the purchase price of the home. Traditional income multiples are not used and the amount which can be lent is based on the rental income received by letting the house to other students.

Bath building Society CEO, Dick Jenkins, says, “Many parents faced with forking out substantial sums of rent for their children when at Univeristy or College have wondered whether this would be a good time to help their children onto the property market instead. So many people in their late 40-‘s and early 50’s have come to view rent as “dead money” and would prefer to invest that money in property. Because the student can consider their university accommodation as their residence, this means that the property does not incur capital gains tax in the way that a buy to let property would. In practice, many students would choose to rent a house with their mates at University anyway and we have found that this arrangement suits families very well-particularly those where the student is doing a long-ish course such as medicine or architecture.”

Do you want to help your child or grandchild get onto the housing ladder?

Our mortgage adviser, Linda Wood, is here to help you.

If you would like advice on your options please call Linda today on 0115 933 8433, alternatively enquire online or email linda.wood@investmentsense.co.uk

The small print (so important we put it in bold!)

Your home may be repossessed if you do not keep up repayments on your mortgage.

For providing mortgage advice we will charge an application fee of £300 and we may also be paid a fee from the lender, any fee paid by the lender will be disclosed to you. Alternatively we will charge an arrangement fee of 0.5% of the loan and refund to you any payment received by us from the lender.