With property prices at record levels, especially in London, more and more first-time buyers are getting help from their parents to get on the property ladder. So how can parents help their offspring buy their first house and what are the potential risks?
Until recently, several banks allowed parents to guarantee their offspring’s mortgage, by pledging to make up any shortfall in payments. That has changed over the last year, but the small challenger bank, Aldermore, still offers a 100% mortgage deal with a guarantee.
So, you can borrow at the bank’s standard three-year fixed rate if a parent or grandparent is willing to pledge the value of their house as collateral. The downside is that the guarantee period can only last for ten years.
Some parents prefer to help by providing some, or all, of the deposit. Each parent can make cash gifts of up to £3,000 each year, which won’t be liable for inheritance tax (IHT) when the parent dies. Any larger gift won’t be liable if the parent dies at least seven years after the gift was made.
Another option is for parents to buy a property outright in their offspring’s name. Since this involves relinquishing control, there is nothing stopping them from selling (or mortgaging) the property and wasting the proceeds. If they marry and then get divorced, the partner will have a claim on a share of the house.
As for younger offspring, children under the age of 18 are not allowed to own property. So if you want to buy a property for a minor, you will have to put it in your name and then give it to them when they become a legal adult. The problem is that the IHT clock only starts from the date of the gift.