House prices are at record highs across much of the country and for many first-time buyers the only way to get onto the property ladder is with help from the bank of mum and dad.
Here are the main options for parents, and even grandparents, who want to help their offspring buy a home:
A lump sum can be given tax-free to children up to a maximum annual limit (currently £3,000, or £6,000 if you haven’t used the previous year’s allowance). Any more and the recipient may have to pay inheritance tax. Parents might want to adjust their wills so that other children feel they are being treated fairly when it comes to inheriting anything!
Nearly all banks are happy to accept family gifts, but many aren’t willing to accept third party gifts from non-family members.
If parents or grandparents want the sum repaying, they need to make clear if they want interest paid back as well. Any interest will be deemed ‘income’ in the eyes of the tax man and need declaring.
Even though it involves your children, it’s sensible to have a legal document drawn up detailing the terms of the loan.
Some parents decide they’d like to benefit from any potential capital appreciation and part or jointly own the property along with their children. The money they provide sits alongside the children’s purchase via the mortgage and is taken into account for the deposit.
In this case, it’s absolutely vital professional advice is sort in drawing up legal documents detailing the terms of the arrangement and covering such items as who is responsible for mortgage payments, the percentage ownership split, and the circumstances under which the property might be sold and any profit realised.
Capital gains issues will, in many cases, arise for parents or grandparents if a profit is realised.
Guarantor mortgages allow borrowers (i.e. the children) to borrow more than they otherwise could, as the parents act as the guarantors of the debt.
Personal income is taken into account and, typically, the parents’ home is used as collateral for the children’s mortgage. It’s usually expected that the parent’s own property is worth at least 25% of any outstanding mortgage there may be on it.
The danger is that, for whatever reason, the offspring can’t meet the mortgage repayments and the parents are then liable to meet them, even if it means losing their own homes.
Family offset mortgages
With family offset mortgages, parents lock their capital away. The lump sum essentially acts as a deposit and helps lower repayments as it’s offset against the interest payable on the loan.
The children can’t access the money, but the parents or grandparents can access it after an agreed date. Usually this is after the outstanding mortgage has been repaid to the point where it’s worth around 75% to 80% of the value of the property.
What it means for home insurance
Insurers may need to be told that other parties have an interest in the property; a quick call to a home cover provider should clear up what is needed and if this affects premiums.
If your home is your haven, you’ll want it to have the best protection. Compare quotes from our range of handpicked insurers and tailor a policy to suit you. For more information, you can call our experts on 0330 0600 600 or visit www.policyexpert.co.uk/contact for more ways to reach us.
Published 16 August 2017