How to help your child buy a home
The average house prices continue to rise, as have the costs of living and renting too. As a result, saving a suitable deposit for a young adult seems almost unachievable, like mission impossible. Therefore, it is no surprise that some children turn to their parents for help in buying their first home, and parents start to plan earlier for their children’s education costs and first house deposit while at the same time juggling their own retirement needs. This article discusses a few options on how you can help your child buy a home whilst ensuring your own financial health.
How can I help my child buy a home?
There are several ways parents can help their children buy their first home, such as:
- Cover the deposit for the house
- Remortgage existing home
- Act as a guarantor on a mortgage
- Get a joint mortgage
Covering the cost of the house deposit
Saving for a deposit is often the biggest challenge first-time buyers face, especially since most lenders require a minimum 30% deposit. We already mentioned that socio-economic factors such as soaring property prices make it especially difficult for people to save that money. Parents can help their child buy a home is to gift them the funds needed for the deposit, which is often the most challenging part for many. The child then arranges and pays for the mortgage itself.
Remortgaging existing home for equity release
Remortgaging means getting a new loan or restructuring the current mortgage on their own property. As such, parents may have the facility to borrow more than they currently own and pass the additional funds raised to their children to use as a deposit for their first home. The increased property valuation leads to more equity being available, which is what in turn helps with additional funding requirements.
However, taking on more debt is a big decision that needs to be considered carefully as your costs may also increase. It may be possible to reduce costs by utilising an interest-only mortgage, but the debt ultimately needs to be repaid, and as such, there should be provisions in the way of investments to do this.
Acting as a guarantor on the child’s mortgage
You can also act as a mortgage guarantor where you agree to take 100 % responsibility for the mortgage debts, should your child fail to pay the mortgage payments. You sign an agreement jointly with your child and the lending institution to guarantee this. To become a guarantor, you have to have creditworthiness yourself, and ideally, you would not have other significant outstanding credits.
Becoming a guarantor could be an option if your child is still at the university, or is just starting on the job market, to facilitate the approval of the mortgage. Then, when your child can prove they can handle the debt by themselves, they can remove you from the mortgage.
Getting a joint mortgage
The ultimate help you can offer your child property is to get a joint mortgage together. You will, at least legally, be equally responsible for the mortgage repayment. A joint mortgage is an excellent option if you require to borrow more money as with your and your child combined incomes, you will allow you to do so. A joint mortgage, in that sense, can buy your child a bigger or better home.
However, if you are a UK homebuyer, a joint mortgage with your child, if you already own one house, can trigger an additional 3% stamp duty rate, making the property unnecessarily more expensive.
Related: Expat mortgages explained
Preparing financially for buying a home for a child
Research from Legal & General has found that 17% of people over 55 years old experienced a lower standard of living after helping their children buy a house. It is not only an additional financial burden to the parents but also an emotional one, as part of their savings that might have been initially set aside as a safe fund is now gone. Therefore, it is essential to get financial advice before committing to such a decision, and ideally, plan for such a big move earlier in life.
Discussing your financial goals and options with a financial advisor can open up ways and solutions you may not have known about before. For example, many different savings and borrowing options are available, and knowing which one to utilise can help you go through the home buying process for you and your child with less stress and more joy. Reach out to us if you have any more questions about the property purchase process, financing options, and strategies to achieve your financial goals.