Is Remortgaging the Best Way to Help Your Children Buy their First Home?
There’s no doubt that for the younger generation, getting a foot on the property ladder is tougher than ever. This raises an important question for many parents: ‘Is remortgaging to help your children buy their first home wise?’ After all by remortgaging you can give your offspring that all-important leg-up?
The Institute for Fiscal Studies (IFS) has published a report that shows that the last 20 years have seen a substantial fall in homeownership among young adults.
It states:
“In 2017, 35% of 25- to 34-year-olds were homeowners, down from 55% in 1997. The biggest falls have been among middle-income young adults.”
The IFS goes further and states:
“The falling rate of homeownership among young adults has become an increasingly high-profile political issue. It has also created a clear economic difference between the older and younger generations.”
Since 1997, the average property price in England has risen by 173% after adjusting for inflation, and by 253% in London. This compares with increases in real incomes of 25- to 34-year-olds of only 19%.
The BBC reports:
“About 40% of young adults cannot afford to buy one of the cheapest homes in their area even with a 10% deposit.”
One in Six Parents are Remortgaging
Rising house prices have all been to the benefit of older generations but it comes with a cost.
It’s happening at the expense of younger people and increasing intra-generational inequality.
The situation is prompting many parents to try and re-dress the balance to help out their sons and daughters. Many are also saddled with hefty student loans.
Research by MoneySuperMarket has revealed that one in six parents who remortgage are doing it to fund their offspring’s financial needs.
The study shows that the average amount given away is £9,050 per adult child. Further figures show that one in 10 adult children receive over £20,000 from their parents.
When asked, 32% of parents said they’d rather accumulate debt themselves than create additional money worries for their child.
Over a quarter (26%) said their son or daughter needed the money quickly and a further 22% said their child was already in debt with their bank and they didn’t want to add to it.
Bank of Mum and Dad
Remortgaging your own home though is not the only way you can help your children get the keys to their first home.
Other options are these:
- Downsize and pass over the excess wealth. Providing you as donor lives seven years after making a gift, there will be no inheritance tax on the gift.
- Guarantee the first-time buyer’s loan. Your offspring may be able to borrow more than they normally would be allowed to if a family member guarantees the loan.
- Set up a guarantor mortgage using parental income. This type of loan can work well if you as parents are still earning and have a small mortgage, or no mortgage. Your income gets factored in to boost the borrowing capacity of the homebuyer.
- Arrange a mortgage guaranteed via a charge on the parental home. Instead of offering cash as a deposit, you can allow the bank to put a charge – like a mortgage – on your home for the equivalent amount. The value of that charge could be, for example, 25% of the value of your offspring’s first house. It remains on the property for around 10 years. It can be reviewed before then. If there is enough equity built up in the home, it can be removed early.
- Set up a mortgage guaranteed with a savings account deposit. Under this scheme the borrower can access as much as 95% of the value of the property being purchased as long as the guarantors – the parents or other relatives – deposit a sum of money in a savings account with the bank. Interest gets paid on the savings to the parent, whose money it remains. Be warned though that the cash in the savings account could be forfeited in the event of a default by the borrower.
Before committing yourself to any of these options you should seek qualified advice to ensure you are making the best decision for both you and your children.
Remortgaging to Help Your Children
Many parents prefer to work with what they have with their bricks-and-mortar asset and to remortgage.
If you have a small mortgage on your own property, you could consider freeing up cash by remortgaging.
This could mean arranging a new mortgage with your existing provider. You’ll often get a better deal however if you transfer to another lender.
Your mortgage term could be increased to absorb the additional borrowing or you can accept that your repayments will rise.
Of course, before you decide to remortgage, make sure you consider the impact that increased borrowing will have on your own standard of living and your retirement plans.
But if you are considering remortgaging now, it is a good time to do so.
Remortgaging activity has been high across the last year. This has meant competition between lenders has remained strong, with numerous good mortgage deals on offer.
“It would have been difficult to predict 10 years ago that we would ever see mortgage rates at historic lows and product numbers at record highs, with providers now vying to compete for new business across most LTV tiers,” says Darren Cook, finance expert at Moneyfacts.
