By Christophe Beaupain for the FT Advisor
From an economic perspective, having a strong housing market is something for a country to be proud of.
However, with the average wage now £30,368 (£586 a week according to the Office for National Statistics), how does the market continue to grow when the average house price is now nearly nine times the average income? This increases to 17 times if you are trying to buy in London.
Current conditions are attractive for first-time buyers seeking a mortgage, with interest rates so low. It is possible to buy a property with just a 10 per cent deposit, but you should find interest rates improve if you are able to provide a bigger deposit.
The pandemic may have encouraged individuals to save more, which is normal in recessionary times, but how long would you have to save to have enough for a deposit?
To put the property market into context, we can calculate how long it would take to save for a deposit to buy an average-priced house by using the savings ratio – a measure of the disposable income that UK working individuals have available to save.
At present the savings ratio is 11.7, but the long-term average is 8.4. So as an example, based on today’s average house price of £270,000, you would require £40,500, plus around £5,000 for associated costs.
At a time where their children are finding it hard to raise the deposit for property, the bank of mum and dad is again stepping in. According to Legal and General, the bank of mum and dad is now the ninth-biggest lender in the UK.
Parents have a range of options for helping their children onto the property ladder, including:
making an outright gift from their own savings;
using their own home;
supporting a mortgage application; or
charging other assets.
Each of these requires some thought as the right choice is, as ever, down to individual circumstances.
Making an outright gift from their own savings
For wealthy individuals with surplus savings that they are confident they will not need for themselves in later life, gifting is the simplest way of transferring money to their children.
It can also have the added benefit of reducing a parent’s inheritance tax liability.
An outright gift is potentially exempt for IHT purposes after a period of seven years. The benefit starts to kick in after three years but if the individual survives seven years, it will be considered as being outside their estate.
Not many parents can afford to offer the full value of the property, so the conversation generally starts with how much the child can afford on the mortgage and how much the parents can help, by making up the difference by way of deposit and costs.
It may be preferable for parents to lend the deposit but in this case, the lender may make a reduction on the amount that they will lend in the form of a mortgage.
For IHT, we would look to help parents to do their sums to clarify how much is affordable for them. If the money is loaned, the child may not be in a position to return the money quickly if the parent needs it back.
The money will, of course, remain within the parents’ estate for IHT purposes.
Another concern for mum and dad is if their child is buying jointly and things do not work out. How do they ring-fence the money so it stays within the family?
Good conveyancers will discuss the ways in which the gift can be made, as well as how the property is owned, such as by a declaration of trust or buying as tenants in common.
Using their own home
Many of the considerations here are common to outright gifting, in that the parents need to make sure that they are not going to jeopardise their own financial plans.
However, using their own home, to either release capital or allow a charge on it, may be an acceptable way to help.
This is a useful way for those who are willing and able to assist their children and are not looking to sell or move home in the foreseeable future.
Remortgaging their home to release the equity to gift to their children can be done either through a traditional mortgage, or an equity release plan if they meet the criteria (minimum 55 years of age) and this is the only way of helping.
Again, individual circumstances will determine whether a taking out a traditional mortgage is possible or whether equity release is required.
Under equity release, the younger you are, the less you can borrow. Generally the interest is not repaid, and lenders are conscious of the time the loan has to compound.
Equity release schemes are designed to be in place until the borrower either dies or moves into long-term care. It may not be the best option for everyone.
However, if the borrower and their families are comfortable with this option and it is the only means available to support a property purchase, then it can work well.
Some schemes permit borrowers to overpay up to predetermined limits, so in effect if they are able to make payments, then borrowers can arrest the rate at which the loans typically roll up, or potentially stop it altogether.
Equity release also creates a debt against the estate for IHT purposes, so can be an acceptable way to make gifts during the parents’ lifetime.
Interest rates for equity release are calculated based on age and loan-to-value, therefore it is less easy to provide a figure. However, as an indication, Aviva’s current most competitive rate is 2.95 per cent.
Supporting a mortgage application
In previous years, guaranteeing the mortgage for your children was a popular way of helping those with challenges around affordability to access funding for a property purchase.
This has evolved over recent years, with more lenders offering mortgages on a ‘joint borrower, sole proprietor’ basis. All applicants on the mortgage will be underwritten with the benefit here that the parents’ income is included.
This can help where parents with healthy incomes can support the application by including their disposable income to calculate the maximum loan.
Under this type of scheme the maximum loan to value is 95 per cent, so it is perhaps a good way of helping the children borrow more without having to commit as much capital.
Although the mortgage is held jointly, the parents do not legally own the property, which can avoid paying a higher rate of stamp duty or becoming liable to capital gains tax when the property is sold.
By structuring it in a way that their name is not on the deed means that the parents are not then caught by the additional level of stamp duty levied against those owning more than one property.
Charging other assets
In another example of lenders thinking outside the box and developing products further, there are some lenders who will lend 95 per cent or even 100 per cent of the purchase price, if the family are willing to ‘park’ some cash with the lender for a period of time.
Barclays offers a specialised product called the Family Springboard Mortgage, and the Family Building Society offers the Family Mortgage.
Barclays will consider lending up to 100 per cent of the purchase price of the property on a five-year, fixed-rate product.
The lender will consider lending up to 4.49 times the income if the borrower’s ‘helper’ opens an account with Barclays and pays in 10 per cent of the borrower’s purchase price.
If the borrower makes all of their payments over the five years then the helper gets their savings back.
Under the Family Building Society’s Family Mortgage product, if the borrower can put down a 5 per cent deposit, then the family has three options for helping out:
1.)Put savings into a ‘family security account’.
2.)Place a charge on family property.
3.)Offset part of the mortgage.
It may be possible to combine the options up to a maximum of 25 per cent of the value of the property.
The Barclays Springboard rate is currently 3.50 per cent fixed for five years with a £999 arrangement fee.
The Family Building Society Family Mortgage rate is currently 3.29 per cent fixed for five years, with a £175 application fee and £599 product fee.
The government, local authorities, housebuilders and families are all aware of the challenges the next generation are facing to gain a foothold on the property market.
The government is supporting buyers with schemes like Help to Buy and the 5 per cent deposit mortgage guarantee scheme.
Housebuilders are therefore able to open up their properties to a wider market, and so are making more available under Help to Buy.
Families also recognise that returns on cash in the bank are low due to the current low interest rates, so are more willing to help by contributing to a deposit, which can also benefit their IHT plans.