It’s no secret that there has been a dramatic increase in house prices in recent times, and young people in particular are feeling the pressure.
Stats from the Office of National Statistics (ONS) show that the average UK house price is now eight times the median salary of £29,000 so it’s unsurprising that home ownership now feels out of their reach.
Increasingly, parents are stepping in to fill the gap – most commonly with money to boost deposits. According to research from the Centre for Economics and Business Research (CEBR), the so-called Bank of Mum and Dad is now the UK’s ninth largest mortgage lender. So how can parents best support their children to get on the housing ladder – there are several options.
Opening a Lifetime ISA
Since April 2017 anyone between the ages of 18 and 40 has been able to open a Lifetime ISA (LISA) which aims to help people either purchase their first home or save for retirement. A maximum of £4,000 can be contributed every year and in return the government will top it up with a 25% bonus. This could prove a tempting option for parents looking to help their children on the housing ladder. Gifts of up to £3,000 of income can be paid into a LISA each year without attracting an inheritance tax charge.
If you don’t have a cash lump sum readily available but do have wealth tied up in your home then you might be able to access a cash lump sum using equity release. To find out details on the two main types of equity release, head to our Good with your Money guide on the bank of mum and dad.
The amount you can release depends on how old you are and how much your home is worth. However, it’s worth noting that interest rates on equity release can be higher than those on regular mortgages so it’s a good idea to consult an adviser who can look into whether this the most suitable choice for you.
Re-mortgaging your home will allow you to release capital to your children. You can choose to either stick with your current lender or switch to a new one. However, it’s worth noting that if you will be repaying the loan into your retirement years then the lender will want proof that you can service these payments.
A second charge mortgage is also an option. This allows borrowers to use the equity in your home as security against another loan. This means you have a second mortgage on your home and you will need to be confident you can service these payments. As mentioned before, an adviser will be able to explain the pros and cons of re-mortgaging.
Acting as a guarantor
Some lenders offer the chance to be a guarantor on your child’s mortgage. The logic behind it is that they’ll be likely to lend more money if someone with secure finances can vouch for the purchaser. If a mortgage payment is missed, you will be responsible for covering it. Of course, this option comes with risks, and it’s important to know if your child is financially responsible enough to take on these costs, since if they miss payments, it can have an effect on your credit.
So it is clear that there are many options available to parents looking to help their children get on to the property ladder. Careful consideration of the pros and cons of each option is needed and a financial adviser can help you come to the best decision.
Helping you understand your money and improve your financial capability is a priority for us at Royal London, which is why we’ve created our Good With Your Money guides. If you want to read more about the Bank of Mum and Dad, you can read our full guide here.