#TuesdayTips – help your kids get on the property ladder
At WhatHouse?, we thought we’d have a look at ways you could help your child get their feet on the property ladder.
With a guarantor mortgage, a parent or close relative guarantees the mortgage debt. If the buyer misses a mortgage repayment, then the guarantor will have to cover the payment. There are an increasing number of mortgages available that limit how much of the mortgage the guarantor is responsible for, rather than having the guarantor being required to pay the entire mortgage loan is their child defaulted.
Normally, the family member guaranteeing the mortgage offers their own property as collateral against the property, which means in the worst case scenario a guarantor could lose their home to cover the debt. But if no repayments are missed it won't cost the guarantor a thing.
An added bonus of guarantor mortgages is that with parents or close relatives agreeing to take on some of the first-time buyer risks, lenders are often more willing to put up more cash, and at a better interest rate than they usually would.
Family offset mortgages
With family offset mortgages, parents or grandparents put their savings into an account linked to their child's mortgage. The money in the savings account is then deducted from the mortgage, making the child's repayments cheaper.
There is a potential downside to this type of mortgage, though. Parents will be able to get their money back in full, but they may have to lock it away until the mortgage has been paid off to between 75% and 80% of the property's value which could take quite a long time. Parents also won't receive any interest on their savings while they are offsetting their child's mortgage.
Family deposit mortgage
Some lenders now offer mortgages where a family member deposits cash in a special savings account and the money is then held as security against the mortgage. This cash is then held for a fixed period of time. If the mortgage borrower defaults during this period, the money will be taken from the savings account.
The benefit of family deposit mortgages is that the family member still gets interest paid on the money linked to the mortgage - although the rate might not be as good as with other savings accounts, and if the buyer meets all their repayments then it won't cost their family anything.
Buy a second home
If you have the money to spare, or are looking to invest in a second home, buying a home for your child is an option, or taking on a joint mortgage with a child and allow your child to live in it.
Give them money
While it may not be the most appealing option, it may be the most straightforward. If your child can meet the mortgage lenders requirements, the bigger the deposit they have, the better rate your child will be offered. When money is given as a gift, provided the donor lives for seven years after giving the money, the recipient won’t need to pay any inheritance tax on the money.