Should You Remortgage to Help Your Child Buy a Home?
Looking at how you could help your child get a foot onto the property ladder?
One option you could consider is a remortgage to help your child buy a home.
Re-mortgaging is not your only choice though. We’ll look at the others below. But whatever option you decide is best for you, your main priority should be to find a solution that works for both your child and you.
It’s a Struggle for Young Home Buyers
There are good reasons for your wanting to help out though. Worrying figures from the Institute of Fiscal Studies show that the biggest collapse in home ownership now is among 25 to 34-year-old average earners. They’re the ones who make between £22,200 and £30,600 a year after tax – a pretty standard income for that age group.
IFS senior research fellow Andrew Hood said: “For those on middle incomes, their chances of owning their own home have fallen from two in three in the mid-1990s to just one in four today.”
The reason for this is that house prices have risen around seven times faster in real terms than the incomes of young adults over the last two decades.
The average age of when people are likely to become homeowners in England has gone up too. It has risen to age 33 years from age 30 years a decade ago.
So it’s tough for young people. That’s despite Chancellor Philip Hammond having scrapped stamp duty for first time buyers on homes worth up to £300,000 in the November Budget to try and help.
Research by the BBC also shows that would-be first-time buyers typically now have to save for eight years to afford a deposit.
If they’re aiming for a London home, a typical 20% deposit in the capital is more than £80,000. Elsewhere in the UK, the average deposit is closer to £20,000.
How Parents can Help with the All-Important Deposit
There are different ways in which you, as a parent, can help your children. But don’t make any choice – including a remortgage to help your child buy a home – that’ll leave your own financial situation vulnerable. Always think through the full implications and if necessary, take independent financial advice.
These include:
- Remortgaging to free up your equity: if you don’t want to move or downsize, then re-mortgaging to help your child buy a home could be a solution. It could allow you to free up that crucial lump sum of cash, providing you have sufficient equity in your home. With mortgage rates at all time lows, re-mortgaging can be an affordable way to access a sum of money for the first-time buyer deposit.
- Short-term loan: depending on your time frame and income, this could be a better choice. If you can afford to pay back the sum within a year or two, then a personal loan may be cheaper than borrowing money by re-mortgaging. But you will likely face larger monthly repayments.
- Guarantor mortgage: this means you, as a parent, ‘guarantee’ your child’s mortgage debt. If they miss their mortgage repayments, you, as guarantor, will have to cover them.
- Family offset mortgage: parents or grandparents put their savings into an account linked to their child’s mortgage. The money in the savings account is subtracted from the mortgage total. This makes your child’s repayments cheaper.
- Flexible family mortgage: in this scenario you can use some of the value in your own home (or that of a grandparent or other family member) as security.
- Joint ownership: both you as parent and your child are named on the mortgage and deeds. The loan size will be calculated on the earnings or assets of both you and your child. As with a guarantor mortgage, if your child is unable to meet the repayments, you’ll become liable for the debt.
Remortgaging to Free Up Equity
If you opt to remortgage, then this could be a good time right now.
You can reduce the cost of additional borrowing by taking advantage of the current very competitive remortgage rates on offer and reviewing your whole mortgage.
You might also want to consider a fixed rate for budgeting security.
But first, Consider these Factors:
- Find out first how much your home has increased in value. Aim to not increase your loan-to-value ratio by borrowing proportionally with how much your property has increased
- Think about the size of your current mortgage repayments and the size of your potential new repayments. Are you happy with larger monthly outgoings and is your financial or employment situation likely to change in the near future?
- Before you switch deals, check whether any early repayment charges still apply to your mortgage and how much they will be
- Be aware that mortgage lending criteria has been tightened since April 2014.
- Check your credit score and understand that so you may find it harder to secure a remortgage if your income has dropped since you last made a mortgage application
If you feel remortgaging is the right decision for you, make a start by reading our ‘Get Remortgage Ready’ checklist here.
If you’d like advice on finding the most cost-effective product for re-mortgaging for your circumstances, you can get in touch with us here.
