How to help your kids buy a home

Getting on the housing ladder for the first time has never been so expensive. The average house prices are at record highs and continue to grow, fueled by the stamp duty holiday and a desire post pandemic for people to have more space.

This means much larger deposits are needed (despite the return of 95% mortgages) and bigger salaries to meet lenders’ affordability tests.

And though a decent number of people have seen their savings pots grow while stuck at home, there are plenty more who see the ever increasing property prices as the final nail in the coffin that could mean they’ll always be renting.

Enter the bank of mum and dad, still seen as a necessity by many with dreams of owning. And judging by our On The Money inbox this is something you’re worried about.

Here’s a selection of the questions you’ve sent through about supporting your children buying their first home.

Should I be a guarantor?

"My son has a good job, but he’s struggling to get a mortgage. He has asked me—as I own my house outright—if I would be his guarantor? This idea scares me as it would put my home on the line. What should I do?" - Laurence, 65

You’re right Laurence, this could put your home at risk so it’s not something to take lightly. A guarantor mortgage usually means you put your home up as security on the loan. This can allow someone with no deposit to borrow up to 100% of the property price.

You wouldn’t need to provide any money upfront and it’s unlikely you’d be backing the full amount. Depending on the mortgage you’ll probably have to agree to liability for between 5% and 25% of the total loan.

Hopefully it’d never be an issue, and once your son has built up enough equity he’d be able to remortgage to a deal without the need of your support.

But if your son gets behind on payments then you legally have to pay up. Though the lender will repossess the mortgaged home first and sell it, any shortfall will still need to be met. And if you don’t have the cash available to do this, then the lender could force you to sell your house.

There’s an alternative form of guarantor mortgage based on savings. You’d need to have the desired sum available, and it’d be locked away until equity has built up.

However, these types of mortgage are usually for those with no deposit, low wages or a poor credit report. If your son earns a decent amount that would hopefully exclude the first two reasons. It could be that speaking to a mortgage advisor will help him find an available deal better suited to him that doesn’t include you, and would hopefully also have lower interest rates.

And of course, there are a number of schemes out there which could help make buying more affordable, including the Help to Buy Equity Loan scheme, Lifetime ISAs, Shared Ownership and the new First Homes scheme. These could also all be checked out too.

Can I gift money towards a mortgage?

"I want to give my daughter a one-off gift of five thousand pounds to help her place a deposit on her first property. But as I’ve never done something like this, I don’t know if there will be tax to pay on it? Can you please advise?" - Elaine

The rules for gifting money from a parent to a child are the same, whether it’s to buy a home or any other purchase.

There’s no tax due unless you die within seven years of giving the money. If that was to happen it’d be lumped in with your full estate and subject to inheritance tax, assuming it’s over the total threshold. The tax rate also reduces depending on how many years have passed, and will be less if it’s between three and seven years.

However each year you get an annual gifting allowance, meaning you can give £3,000 without any tax due. This is a personal allowance too, so if you are in a couple then your other half could also do the same.

You can also carry over all or part of the allowance for one year, meaning if you didn’t use it last year you can give up to £6,000 this time around.

The last thing to note is the mortgage lender might require evidence that the money is a gift rather than a loan.

What happens to Help to Buy ISA overpayments?

 "I’ve been paying into my son and daughter’s Help to Buy ISAs but  just realised that there is a limit of £200 per month. I have been paying in far more than this at times. What will happen? Will they lose the money?" - Juliana

Ultimately they won’t lose the money you’ve put ini—it’s yours to give—but they won’t get the 25% bonus from the government on anything above the monthly limit.

I’d check with the banks though to see what they’ve done with the excess cash. It could be they have already rejected the additional money and returned it to you.

Also, it might be worth transferring the money in the Help to Buy ISA to it’s replacement, the LIfetime ISA. It’s very similar and they’ll get the same bonus on money saved there. But there are a few key differences.

The main one is you can save up to (and transfer in) £4,000 in a LISA each financial year, and there’s no monthly limit. So you’ll be able to add more money if you have it. It can also be used towards more expensive properties outside of London.

However, the account must be open for 12 months before it can be used, which won’t be any good if they plan to buy sooner. Plus if they don’t use it towards their first home (perhaps it costs more than the £450,000 allowed), the money can’t be withdrawn fee free. The only option to avoid this 25% charge is to put it towards retirement - meaning accessing it at 60.

Read more: How inflation can affect the housing market

Read more: All about the power of attorney

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