How can my children get on the housing ladder?
This is an increasingly common question that I hear from clients with children in the 20-something age group. Our position as financial advisers is to guide them through the myriad of options and the most tax-efficient routes.
However, one question that many commentators do not feel comfortable asking is: “Is your child mature enough to take responsibility and budget properly?” This is a major point in homeownership and should be the starting consideration before running through the following options.
Option one – the parent pays the deposit
The question that then arises is, what if my darling daughter were to marry someone “unsuitable” and they divorced and he got half the house? Could I risk loaning her the money?
The answer here is yes, you can, but it needs to be a properly drawn-up declaration/loan deed. However, most mortgage lenders will deduct the loan from the amount she is able to borrow, which means it rather defeats the object.
In addition, where inheritance tax is an issue for the parent, the loan will still be part of the estate on death and could be taxed at 40 per cent. This can be avoided by gifting the amount into a trust and then the trustees can decide to loan the money to your daughter. This means the parent would never have access to those funds but a properly drafted trust and loan deed ensures the funds go down the family line.
It is important to involve a good mortgage adviser to negotiate with the mortgage lender as you need to be totally honest when stating if the sum is a loan or a gift.
Option two – the 100 per cent mortgage
This loan is available to borrowers who do not have a deposit at the outset. It may be possible to borrow more than the asking price with a view to covering associated costs such as solicitors’ bills and stamp duty.
There are downsides to this type of arrangement. The buyer does not have the cushion of an equity stake and interest rates are generally higher. You are also more likely to incur a higher percentage lending fee. This is a one-off insurance payment to protect the lender if the property should be repossessed and sold for less than the outstanding mortgage.
Option three – tenants in common
Where income is low, it might be worthwhile considering buying a property with a friend or friends. More than one income can be added together, thereby giving greater buying power.
Tenancy in common is a legal term involving two or more people owning a share in the property at a pre-agreed split. The downside is if one or more parties decide to sell their share, they will have the right to do so.
Again, a properly drafted declaration of trust where all parties sit down and agree what will happen in a variety of scenarios is needed. For example, they could agree that in five years time they will sell the property unless they all agree to keep it. By incorporating such a clause in a legal declaration of trust, it can remove all manner of potential problems later on.
Option four – shared ownership
This type of scheme normally involves a third party such as a housing association. If house prices are out of reach for the first-time buyer, this type of scheme allows buyers to purchase a percentage of the property, with the option of purchasing the remainder at a later date. The buyer must pay rent to the housing association on the share retained by them.
Option five – graduate or professional mortgages
Certain mortgage providers have designed specific products tailored around graduates and young professionals. The main advantage is increased income multipliers as there is an expectation by the lender that salaries for many graduates will increase at a higher rate than normal.
Option six – guarantor mortgages
Often used in conjunction with a graduate or professional mortgage, some lenders will allow a close relative to give an undertaking that they would maintain the mortgage payments if the borrower falls into financial difficulties. At a later date, once the borrower can demonstrate the ability to take the mortgage out in his or her own right, the guarantor can be discharged from their undertaking.
Yvonne Goodwin is associate director of Pearson Jones