Parents feel the pinch helping kids buy property: four alternatives to giving cash
The study of 2,000 so-called ‘lenders’ found that 17% of over 55s would be, or already are worse off as a result of providing financial assistance to family members.
One in 10 said they felt less financially secure and 4% admitted they had to postpone retirement after helping loved ones on to the property ladder.
The research from Legal & General found that, based on the average contribution from the Bank of Mum and Dad, an over-55 household would be £18,000 worse off after providing financial support.
It added that over 50,000 transactions partly or wholly funded by those cashing in their pension pots are expected in 2018, with 23,000 deposits provided by retirees using their annuity income.
For 44,000 first-time buyers, the Bank of Mum and Dad will have released equity and one in five transactions will be helped by parents downsizing.
Legal & General also found that parents and grandparents (77%) are unlikely to take advice regarding the impact of financial decisions made to help out loved ones.
The Bank of Mum and Dad is expected to be the equivalent of a £5.7bn mortgage lender this year, responsible for more than one in four UK housing transactions. But with these parental lenders feeling the pinch, Legal & General said contributions had fallen by nearly 20% compared with 2017.
Chris Knight, CEO of Legal & General retail retirement, said: “The Bank of Mum and Dad continues to play a major role in the housing market, but the support many people provide is leaving them feeling the pinch as they approach retirement. This generation is helping family onto the housing ladder, but they don’t necessarily have the wealth to do so without impacting their own retirement plans, and they should get advice to make sure this won’t leave them short of funds.”
Alternative ways to help offspring on to the property ladder
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “Few people can spare £18,000 without having a significant impact on their own finances, so we’re seeing alarming numbers of parents sacrificing their own standard of living or postponing retirement as a result. But handing over an enormous lump sum isn’t your only option: there are alternative ways to help your offspring onto the housing ladder.”
- Be a guarantor on their mortgage
If your child can’t pay the mortgage, this means you’re guaranteeing that you’ll step in. The stakes are high as not only could your offspring lose their home if neither of pay the mortgage, but if you used your own home as part of the guarantee, you could lose that too.
- Look for a specialist mortgage
Lenders have realised there’s a market for family mortgages. You can, for example, get a mortgage where a parent provides a 10% deposit as a loan. If offspring meet all remortgage payments in full and in time for the first three years, parents get the loan back in full – with interest.
Alternatively you can use a family offset mortgage, which allows other family members to put savings into an account that’s linked to the mortgage. The savings are offset against the loan, which can be used to reduce interest payments or shorten the length of the loan.
- Buy with your child
You can make a lump sum investment in a property, and buy with your offspring. If you buy as tenants in common, you don’t have to own the property 50:50 – it can reflect what you’re both putting in. You will also have the freedom to leave your share of the property to anyone you want in your will.
There will be tax implications if you own your own home, because you will pay the 3% stamp duty surcharge on second properties. When you come to sell you will also face capital gains tax on the portion of the property you own as a second property.
You also need to consider the practicalities, and what would happen if they can’t afford mortgage payments on their share of the property, if they want to move house, or if you need to get your money back. If you take this approach, it’s a good idea to get a lawyer to draw up a deed of trust, so it’s clear where you stand.
- Let them move back in
If your child is struggling to build a deposit while they rent, you can offer them opportunity to move back in and save their rent money instead. Encourage them to open a Lifetime ISA to redirect rental payments into. They can pay in £4,000 a year, and the government will top it up to £5,000. If they are buying with a partner or friend, this takes them to 5% of the average price of a first home in a year, so they can use the Help to Buy equity loan scheme from the government to cover the rest, and move out for good.