In a generation of renters and rising house prices, it is hard for many young people to get on the property ladder. Sometimes the only option is for parents to help out with the deposit.
Currently, the property market is pretty strong in the UK, with many first-time purchases being made with the help of parents who want to see their adult children get onto the property ladder before prces rise even more and become more out of reach. In 2016 it is thought that in the UK parents lent £5bn for property purchases for their offspring. Grandmas and Grandpas are also getting in on the action because all help is appreciated when it is so hard to buy your first home.
If you are fortunate enough to have parents who can help out financially, and are willing to do so, this is a huge advantage to a secure financial future. Nevertheless, most parents are sensible about it and have legal contracts drawn up so that it is clear who owes different amounts and when that money is expected to be paid back.
But what about parents who want to help their children, but who don’t have the lump sum to help them out with a deposit?
Parents Acting as a Guarantor
Guarantor loans are another option when parents cannot afford to lend a big chunk of cash. They allow the first time buyer to take on a larger loan than they could have done alone, as long as the family member is willing to act as a guarantor on the money owed. Usually, the family member would have to own their own home to be able to do this but the loan itself would not be secured against the home. As long as children maintain payments there is no issue and nobody loses a thing, and there is everything to gain; security and the potential of increasing property values. The risk is, of course, that if the child does not continue to make the repayments it could result in the parents having to make the repayments.
This type of loan not only risks the parents finances but could also affect the personal relationship between parent and child so is not a situation to be entered into without a serious amount of thought. If you are considering becoming a guarantor make sure you read the definitive guide to guarantor loans before you do so.
Another way for parents to help a child get on the property ladder is via an offset mortgage, or a family offset mortgage to be exact is where the family member puts a chunk of money into a savings account which is then linked to the mortgage of the adult son or daughter. They cannot access the money at all, but it counts as a deposit on a home. This makes the interest on the mortgage lower because the amount of savings is taken off the loan. This does mean the money is unavailable to the family member for a set period of time, but it does protect the money and make it available in the future for another child to use for the same thing, effectively recycling it.
If you do plan to ask your parents for help…
- Do your research first so that you can give them lots of options
- Have proof ready for them to see that their money is not at risk. They love you but, they will need to see you are responsible and can meet mortgage repayments. The risk of losing their life savings is huge and they have a right to stop anything like that happening.
- Be prepared to take emotions out of it. They might say no, because they have to think about their financial situation which you may not know about in full. They might also want the entire set up to be legally tight to protect everyone involved from a dispute. Do not take this personally at any point, it is just sensible for everything to be transparent.