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Property prices have risen so much and have shot so far above average earnings that it is now becoming very hard for first-time buyers to get their foot in the door of the property market. Many young people are therefore turning to their parents for help to get a mortgage. Mortgage providers have caught on to this phenomenon and many even offer specially designed ‘joint’ mortgage products for first-time buyers and their parents. The trend for sharing mortgages with people other than spouses or partners started with friends buying together to live as flatmates, allowing single young people to live independently. Then came the trend for getting a mortgage with parents, which can have many advantages over mortgages with friends. With friends, it’s inevitable that circumstances will change and either they or you will want to move out sooner or later. It’s therefore advisable to have signed written agreements to clarify what will happen in such situations. With parents, on the other hand, young people can afford to live by themselves as owner-occupiers without the worry of potentially having to sell up or buy out another flatmate at some future point. However, such arrangements can have consequences in terms of tax for the parents. This shouldn’t pose a major problem but it should be researched carefully before taking out such a mortgage. You have various options when it comes to arranging a mortgage with your child. One way is to be a guarantor, which means committing yourself to making your child’s mortgage repayments if they are struggling themselves. Even with a parent as a guarantor, mortgage lenders will still want to assess your child’s financial situation to ensure that they are capable of taking on a mortgage. And to be able to become a guarantor, you’ll need to be financially comfortable yourself. The mortgage lender will assess your financial situation as well to ensure that you have the necessary income, particularly if you already have a mortgage of your own. The way it normally works is that you will have to provide a guarantee for the entire loan. There are, however, some products on the market in which parents can provide the guarantee for the surplus loan amount that the child is unable to meet themselves. As a guarantor, you are not considered in legal terms to have any ownership rights on the property nor any equity that it accumulates, because you won’t be named on the deeds. To all intents and purposes, the property and all rights to it are fully in your child’s name, just as with a normal mortgage. Your child is therefore still independent. A bonus for you of arranging this type of mortgage with your child is that, as you technically have nothing to do with the property, you won’t be subject to capital gains tax if it is sold and makes a profit. Once your child has a high enough income to be considered eligible by the lender to take responsibility for the full mortgage, it is possible to cancel your guarantee arrangement. Bear in mind that you will not be in the communication loop – all communication will be between the mortgage lender and your child as you will not be named on the mortgage deeds. This means that you possibly might not hear about any problems your child might be having with keeping up repayments until the lender contacts you to bring the guarantee into action. It’s also important to note that acting as a guarantor will reduce the amount a mortgage provider will lend you if you decide to take out any future mortgage yourself. So unless you know that you are settled in your current home and have no intentions of moving in the foreseeable future, acting as a guarantor could be a potential obstacle for you. Another option is a joint mortgage, in which you share equal responsibility with your child for repayments. As with any other joint mortgage arrangement, you will be named on the mortgage deeds along with your child. When your child is able to take on the full mortgage themselves, you can give or sell your part of the mortgage to them. If you have a mortgage of your own already, your tax situation will become more complex. Your child’s property will be considered a second property of yours in addition to your main home as you will be named on the deeds. This means that you could be subject to capital gains tax when it comes to giving up the property, whether you sell to either your child or another buyer or gift your share to your child. Also remember that stamp duty will apply if the property is worth £125,000 and you will be jointly liable to pay this. Finally, you could give a sum of money to your child as a gift. With a large sum of money as a cash deposit on a property purchase, the mortgage amount that they would require would be reduced, allowing them to be able to afford a mortgage of their own. If you’re lucky enough to have the savings in the first place, this will be very easy to do. However, even if you don’t have the savings to hand it’s still possible to obtain cash by remortgaging your own property if you have equity in your home. Money gifted like this is normally subject to tax. For example, it will fall under the inheritance tax laws if your estate is worth over £285,000, meaning that it will be subject to 40% tax if you pass away during the seven years after gifting the money. Another point to bear in mind about giving money to your child to use as a deposit is that mortgage lenders may not be keen on this arrangement if you are giving the money as a loan and are asking your child to make regular repayments, because this of course will have an impact on how much they can afford to repay on their mortgage. If you are considering helping your child to buy their first property, it would be wise to have a consultation with a professional financial adviser. The tax implications and financial arrangements can be quite complex so it is important that you fully understand the consequences and whether it is appropriate for you to take on such a commitment in your personal financial circumstances. This article is copyright protected and is not for republishing |
