Five ways to get on the property ladder without the Bank of Mum and Dad
The Bank of Mum and Dad is running out of cash, with parents giving their kids an average of £18,000 to get onto the property ladder, down from £21,600 last year.
At the same time, the average price of a first-time buyer property went up by 3% in the 12 months to March, hitting £188,429, according to Legal & General.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “Hundreds of thousands of parents are still putting their hands in their pockets to help their offspring onto the property ladder – it’s just that those pockets aren’t as deep as they once were. Parental payouts have fallen 17% in the past year, and with first-time buyer property prices rising 3% over that time, young adults are facing a growing Parent Gap.”
So, how can wannabe homeowners close the gap?
Coles suggests the following five strategies:
The Lifetime ISA
Buyers aged 18-39 can put up to £4,000 a year into a LISA, and the government will add a 25% bonus on contributions each month: that’s up to £1,000 of free money from the government each year. If you can put away the full amount each year, in less than four years you can build up a 10% deposit on the average first time buyer property – slicing a year off the total time it takes to save. To qualify you will need to hold the LISA for at least a year, and buy a property worth no more than £450,000.
Help to Buy ISA
If you don’t qualify for the LISA (on age grounds or because you are buying within a year) you can get a Help to Buy ISA instead. You can save £1,200 in the first month and £200 thereafter, and get a 25% bonus on the first £12,000 you put away. The HTB ISA can be used to buy a property worth up to £250,000 (£450,000 in London).
This enables you to buy a share in a property (as little as 25% of it), pay a mortgage on that share, and pay rent to a housing association on the rest. At a later date, you can buy a larger share of the property (known as staircasing) at the market rate at the time. To qualify, your household income must be less than £80,000 or £90,000 in London.
Help to Buy Loans
This is a government scheme available to buyers moving into new-build property. The government will lend you up to 20% of the cost of the property, so you only need a deposit of 5% and a mortgage for 75% of the cost.
The government loan is free for the first five years. After that you will pay a loan fee – which rises each year. You will also have to repay the government loan after 25 years or whenever you sell the property – whichever is sooner.
Now that the scheme has been around for five years, if the price of the property has risen sufficiently, some mortgage companies enable homeowners to wrap the government loan into a remortgage, and repay the government before any fees are due.
Parental help in other ways
Parents who cannot afford to give the cash to their children could consider buying with them, and owning part of the property. Their children could then pay rent and buy the rest of the property from them as their financial situation improves.
Mortgage companies also offer a variety of ways for parents to help, from guarantor mortgages (which usually enable buyers to get larger mortgages if their parents guarantee to cover repayments if their offspring cannot pay) to family offset mortgages (where parents put their savings into an account linked to their child’s mortgage).
Further reading: ‘Help your kids buy a house without handing over stacks of cash‘