Buying a property with your parents (or grandparents)
Buying a property with your parents’ help, or help from your family, is an increasingly common strategy. Of course, the option’s only open to a fortunate percentage of the population (about 59 per cent of home-buying under 30s, according to 2017 research from Tesco Bank, and 18 per cent of those aged over 40). But if it’s something you’re thinking about, the so-called ‘Bank of Mum and Dad’ is explained below, with up-to-date laws and tax restrictions for 2017.
This week, we’re also hearing that one in ten grandparents have gifted grandchildren with enough money to put down a deposit, the average gift being £15,000. It’s a good opportunity for millennials and first-time buyers to look again at their plans to get on the property ladder, and if they’re fortunate enough, working with family to make their aspirations a reality.
Is it a gift or a loan?
Simply put, mortgage lenders tend to prefer a gift to a loan. This is for obvious reasons, with a loan being something you’re obliged to pay back, eating into your ability to meet monthly mortgage payments. So even if you’ve worked out that you could take a loan from your parents and make payments to them whilst meeting your mortgage responsibilities, on paper, the lender will prefer deposit money to come as a gift.
You’ll need to rule out inheritance tax
As morbid as it sounds, death is a big part of ‘gifting’, in the taxman’s eyes.
If your parents die within seven years of paying the gift to you, the money becomes part of their ‘estate’ (all the money and property owned by the deceased), and inheritance tax could apply.
Preparation is key, and it can really help to work with a qualified expert here, on the finer tax issues. Currently, your parents can give you a maximum of £3,000 each tax year, known as their ‘annual exemption’ before inheritance tax kicks in, and they can also carry any unused annual exemption forward to the next year, but only for one year (i.e they can’t build it up for years and years). If you get married or enter into a civil partnership, the limit for that year will increase to £5,000 (£2,500 for a grandchild or great grandchild).
It’s a point to remember, especially with many home buyers well into their forties now using money from parents to put down a deposit. For the majority though, inheritance tax is only a concern if both parents die within seven years of each other, and their estate is worth over £325,000.
Divorce, splitting up and your home. Who gets what?
Again, as negative as it may sound, you need to consider what will happen if you’re buying a property with your partner or spouse, and you split up.
Working with a solicitor on your joint buy should mean you’ll be able to get a ‘Deed of Trust’, which will show how the ‘equity’ (the value of the property assets you own, mortgage deducted) should be divided if the relationship ends.
Have you thought about joint buying with your parents?
Depending on your parents and their employment status, you could opt to take out a joint mortgage. They’d be named on the deeds and in the lender’s eyes, you’d be collectively responsible for keeping up with mortgage payments.
It’s this collective responsibility that can make you more attractive to lenders, because in theory there’s less chance of payments being missed and you defaulting on your mortgage. It can also help you to borrow more from the lender.
If your parents own their own home, your property would be classed as their ‘second home’, for tax purposes, so it’s very important to bear tax status in mind before you go ahead. If this is your situation, the parent will need to pay capital gains tax on any profit when the property is sold.
Age is important
In reality, many joint-buy properties have shorter than average mortgage terms, if the purchase is shared with parents. This is because lenders prefer to keep terms from extending past a mortgage holder’s 70th birthday (65th in some cases).
That means, if you’re looking for a minimum 30 year mortgage term and are buying with your parents, they’ll need to be aged 35-40. Of course, this is rarely the reality, so you may need to look at shorter mortgage term options. Most banks and lenders will have plenty of options for this.
Downsizing (to give you a step up)
In this case, your parents or grandparents would be selling their home to release equity, downsizing to something less financially valuable (usually smaller) and using the spare cash to help you with your own deposit.
It’s a popular option for some people, who in growing older are ‘outgrown’ by the family home and are keen to live somewhere that requires less maintenance and care when they’re away. There’s also the added bonus of less exposure to inheritance tax, because by downsizing you’re cutting the taxable value of the estate, but this will depend on your parents’ circumstances.
The same tax implications apply here as to gifts (covered above), so proceed carefully and plan as much as you can, well in advance.
Again, this option is increasingly popular, but more likely than any of the above to impact on family relationships and bring with it emotional issues. Consider taking legal advice and remember, it’s not something that you can simply ‘pay back’. Parents selling their home to release equity and fund your own buy means they’ll need to find a new home to love, one that’s worth less money, possibly smaller and potentially not in the same postcode or even city as they were in before.
Is remortgaging sensible?
Not all parents have a big-value home or cash to give away. If this is the case and they’re still keen to help you get a foot on the property ladder, remortgaging (or taking out a secured loan) is an option. The risk is much higher, however.
For one thing, your parents will need to pay interest on their new mortgage arrangement or loan. Also, their own home is now at risk, if they can’t keep up with the new monthly mortgage repayments. With most parents nearing retirement age at the point of helping to fund their children’s purchase, they’re likely to be turned down by lenders for remortgaging.
Take a look at our in-depth guide to alternatives to mortgages, for a whole section on guarantor mortgages and who they might work for.
Simply put, a guarantor mortgage is where your parents guarantee in writing with the lender that they’ll be responsible for mortgage payments, if you’re not able to make them. The lender will assess affordability, along with your parents’ other outgoings and financial obligations, and make a decision.
This is a popular option for buyers who will otherwise find it difficult to get accepted for a mortgage, such as those who are self-employed or have a poor credit history, as well as those without much deposit. However, it’s not without risk and unlike the simplicity of a ‘gift’, a guarantor mortgage obligates your parents. A ‘charge’ will be put on their property, meaning that if neither party can make the mortgage parents, their home could be repossessed.
Buying with your parents’ help, whether financial or in writing, can make the difference between getting on the property ladder and being stuck in limbo. However, it carries particular risks, and not all of them financial. You need to be clear on how you feel (and your partner, if you’re buying together) about your parents being involved in the deeds and purchase, and of course, how they feel about becoming part of the equation, perhaps with some risk to their own home. Talk things through, plan and take legal advice where you need it.