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Bank of Mum and Dad – How to Use Your Equity to Help Your Child

Posted 27 December 2017

If you need to release equity from your home to help your child buy a property, read our essential guide...

Research in 2016 revealed that single first-time buyers now need to save for an average of 13 years to accumulate enough money to put down a deposit on a home. Buyers in London must save even longer to afford to buy a property.

With more and more first-time buyers finding it tough to get onto the property ladder, it’s perhaps no surprise that so-called ‘Bank of Mum and Dad’ is increasingly having to step in and help out.

If you have equity in your home, it’s possible to use this to help your child onto the property ladder. Keep reading to find out more about the ways you can use your equity to help your child get onto the property ladder.

Remortgage your home

If you have a mortgage on your home, or if you own your home outright, it’s possible to remortgage your home to borrow additional funds.

Remortgaging involves replacing your mortgage with a new one, most commonly with a new lender. The interest rate you pay will depend on the equity in your home, and a lender will want to see proof of your income to establish that you earn enough to support the mortgage. You will also have to show your income and outgoings to demonstrate that the loan is affordable to you both now and in the future.

You will normally have a choice of fixed, discounted and tracker rates and some lenders also meet the valuation and legal costs incurred in a remortgage.

Borrowing money against your home has an element of risk as it means your home could be at risk if your circumstances change and you can’t pay the mortgage. You should also be aware that many lenders have upper age limits on their mortgages, meaning you may have to take the loan over a short term. This could push up your monthly repayments.

Equity release

Under an equity release scheme, you release money from the value of your home, either as a lump sum or as a new monthly income. If you want to provide money to help your child onto the property ladder you will typically want to choose a lump sum.

Equity release is a popular option for people who have a significant property asset but limited income, as you typically don’t have to make any monthly repayments. Instead, the interest is ‘rolled-up’ into the loan.

When your home is sold, the lender is repaid the loan amount and the interest that has accrued on the loan. Generally speaking, the older you are, the higher the percentage of your property value you can borrow.

You should bear in mind that although your interest payments are usually fixed, interest can quickly mount up – thus reducing the amount eventually paid out to your family when the house is sold.

Equity release has some risks and can be a complicated product. You should always seek independent advice from an expert if you are considering equity release.

Family mortgages

In recent years, several lenders have launched innovative ‘family mortgages’, designed for parents who want to help their children onto the property ladder.

For example, Aldermore's Family Guarantee Mortgage is designed for first- or second-time buyers who have little or no deposit but do have a parent, step-parent or grandparent who are prepared to provide a guarantee secured against their own home.

Market Harborough Building Society have a ‘Family Assistance Mortgage’ which lets younger buyers borrow 100% of the value of the property on the condition that their parents allow a second mortgage to be taken out on their home.

The total loan to value across both properties must remain below 75%, meaning you will need to have plenty of equity in your home.

Other lenders who run similar ‘family mortgage’ products include the Vernon Building Society, the Harpenden Building Society and the Family Building Society.

Family offset mortgage

If you have raised money through a remortgage or equity release, you can use this cash to help your child under a ‘Family Offset’ arrangement.

Here, you put your savings in an account linked to your child’s mortgage. Your child can’t access this money, but it effectively acts as a deposit on the property that they want to buy. And, if you put down a higher amount of savings, it can reduce the interest rate charges on the mortgage.

Under this type of scheme, you do retain access to the funds, although you will have to commit them for an extended period – typically until your child’s mortgage is worth 75 to 80% of the property value.

One of the longest-running schemes is Barclays’ ‘Family Springboard Mortgage’. Under this scheme, the younger buyer can take out a 100% mortgage if their parents can provide 10% of the property’s price, in cash, as security.

Of course, if you don’t have this cash available, you will still have to raise it through a loan on your home.

If your child keeps up all their mortgage payments on time, you will have your savings returned to you, with interest, after three years.

Consider all the risks before you help out

However you decide to use your equity to help your child, you should always remember that there are risks with all the approaches. Ask yourself these questions:

  • Do you simply want to give the money away, or do you want your child to pay it back? What happens if you need the money at a later date?
  • Can you make any mortgage/loan payments, not just at the outset but in the future? Always remember that you could lose your home if things go wrong.
  • Have you sought advice from a property solicitor?
  • Have you spoken to an independent mortgage broker about the options available?

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