With the average first time buyer needing at least a £16,000 deposit, it’s not surprising many of us buy with help from our parents. But the combination of family members and large sums of money can be fraught with problems.
Read this guide to learn about the tax implications, legalities and mortgage options you need to know about when you are buying with family help.
Gifting vs. Loaning a Deposit
The easiest way for parents to help you is to simply gift the money needed for a deposit. Mortgage lenders prefer deposit money to be a gift and usually ask for a letter from parents confirming that the money does not need to be repaid.
Just be aware that if your parents die within seven years of making a gift, the money will be treated as part of their estate and may be subject to inheritance tax.
You can carefully plan for the inheritance tax issue if you prepare well ahead of the purchase – your parents can give you up to £3,000 a year which won’t be counted for inheritance tax, and in a year when you get married they can give you a further £5,000.
If your parents die within seven years of giving you money, you may have to pay inheritance tax
But given that inheritance tax is only an issue if your parents both die within seven years and their estate is worth over £325,000, it shouldn’t be a concern for most people.
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If your parents want to loan you the money, your mortgage lender will take the loan repayments into account when working out how big your mortgage can be. This means you may end up being able to borrow less than if the money had been a gift.
Parents should also remember that when you repay the money, they will have to pay income tax on any interest they charged you.
How to Protect a Gift from Exes
If your parents are giving you some money to help with your deposit, and you plan to buy with a partner, it’s worth considering what will happen to the money if you split up.
A great way to protect the money is to get a ‘Deed of Trust’ drawn up by a solicitor. This will state how the equity in the house should be divided if you break up with your partner. Prices start from £100 for the solicitor’s time, but this may be a small price to pay if it protects your family’s cash.
If your parents are still working, you could take out a joint mortgage. This means both names are on the deeds and both you and your parents are responsible for the mortgage payments.
A joint mortgage should make it easier for you to get a mortgage and borrow a larger sum than you would otherwise.
But beware, it can have tax implications for your parents if they already own their own home. The taxman will view the new property as a second home, which means they may have to pay capital gains tax on any profit when the property is sold.
It’s also worth remembering that both you AND your parents will be liable for the full mortgage amount if the other doesn’t pay up.
The length of your mortgage will also depend on your parents’s age. Many lenders don’t like mortgage terms extending beyond the mortgage holder’s 65th or 70th birthday, so for a typical 25 year mortgage this would mean a maximum age for parents of 40 to 45 when the mortgage is taken out. If one of your parents is older than that the mortgage term may need to be shorter.
The Risk of Remortgaging
Although this is great for you, especially if the money is a gift, it will cost your parents, as they will have to pay interest on the loan. And, perhaps more importantly, they’ve put their own home at risk if they cannot keep up the monthly repayments. This is a far from ideal option, and your parents may struggle to remortgage their home if they are nearing retirement.
This option should only be considered as a last resort.
Is a Guarantor Mortgage the Answer?
If your parents are homeowners, with a decent amount of equity in their property, it may be possible for them to act as guarantor for your mortgage. This means they guarantee to pay your mortgage if you can’t afford to. The lender will assess their income and make sure they can afford both their own outgoings and your mortgage payments too, if they decide they can the lender will allow them to be a guarantor. To check whether you are likely to be accepted by the lender, before making the application, you should check your credit report. For totally free access to your credit report, sign up for our free service.
There is a catch though. A “charge” will be put on your parents’ property and in the event that you default on your mortgage payments, the mortgage lender can pursue your parents for payment. If they can’t pay either then, ultimately, their home could get repossessed.
On the plus side, because of the additional security a guarantor offers, mortgage lenders are sometimes willing to lend more than if you didn’t have a guarantor.