Building your Tembo Plan
What options are there for the Bank of Mum and Dad?
The Bank of Mum and Dad is big business in the world of homeownership. Typically it lends around £6bn each year, making it a top ten UK mortgage lender. But while that's brilliant news for those whose families have money readily available to hand over for a deposit, for the majority of people it simply isn't possible. Not many families have £59,000 in cash savings at all, and those who do might not be willing or able to part with that amount.
Yet the problem for younger generations is real. If you look back 35 years, the average deposit required to buy a home was £1,000. That equated to about 10% of a homebuyer's annual salary at the time. Roll forward to 2021 and the average deposit required is 80% of a homebuyer's average annual salary. In areas like London, this can increase to 200-300%.
So, with little prospect of getting on the property ladder without a helping hand from the Bank of Mum and Dad, we've set out a few options below for families to consider.
This is the most obvious option (and in many ways the easiest). If you have spare funds in the bank, or are able to sell some shares or investments, then you can simply hand over some cash to your children, grandchildren or loved ones. Generally the issue here is that people don't have access to the kind of cash you need for a house deposit these days, but equally it's important to be sensible and keep some money aside in case you need it in the future.
Let them live with you
If you've got the space, you could let your children or younger relatives move back in with you. We've all done it, so it's nothing to be ashamed of! This will give your lodger (!) time to save some cash towards a deposit. Be warned though, that it takes an average of 8 years to save a deposit, so you might be in for the long haul!
Downsize your home
You may decide that you want to move to a smaller or less expensive property once the family have flown the nest. That would in turn allow you to release some funds that you could pass on to your loved ones. This is a huge decision to make, and for many people they simply don't want to leave! Depending on the value of your home, there are also potential inheritance tax benefits from retaining assets in your home rather than in cash or investments.
Buy the property with them
You could jointly purchase the property with your child to increase their affordability. The main hurdles to get over here are the amount you can borrow and the term of the mortgage:
- Your earnings (pension and employment) as well as outgoings and credit history will determine how much income you can add to your child's mortgage.
- There will be an upper age limit on when the mortgage will need to be repaid, which is generally around 75-80 years old, although some lenders will go a little older. This means that your age could restrict the term of your child's mortgage, making the monthly payments steep.
Aside from the above, you should consider taxation. If you already own a property you may be hit by a 3% stamp duty surcharge on a second home, and there are capital gains tax considerations too.
Guarantee the mortgage
A number of lenders offer specialist guarantor mortgages. They broadly fall into two categories. The guarantor can either put their home up as collateral for the buyers’ mortgage or they can put down some cash which is held aside for a number of years whilst the buyer pays down some of the mortgage. The downside of these products is they can be more risky for the guarantor, particularly if they have put their own home up as collateral. The rates also generally more expensive too.
Allocate some of your income to the mortgage
With an Income Boost (in mortgage-land this is called a Joint Borrower Sole Proprietor mortgage) you'll be on the mortgage but not a co-owner of the property. This means you can boost your loved one's borrowing power without any tax implications to yourself. You can arrange with your child/homebuyer that you won’t make repayments, but the risk remains that if something goes wrong you would be liable for the mortgage. Similarly to guarantor mortgages and co-owning, there is also an age limit on how old you can be at the end of the mortgage. For most lenders that is 75. For a typical 25-year mortgage, that would mean you would need to be no older than 50 at the time the mortgage was arranged.
Unlock money from your property
Chances are, your home is now worth significantly more than it was when you bought it, so why not share some of those gains with your loved ones. Tembo specialises in helping families unlock funds from property in a safe and ethical way so that they can support getting their children onto the property ladder. Our Deposit Boost uses a range of loans to do this, including the recently authorised Retirement Interest Only mortgage. You can borrow right up to the age of 90, and the products are flexible meaning you can set the term of the loan to suit your needs. There is a monthly interest cost that needs to be paid, but compared to equity release these products are generally work out about a third of the cost over a period of 10 years. The downside is you need to go through an affordability test, so having pension income either now or in the future is essential.
There you have it. Seven ways to help your children get on the ladder, only one of which actually requires you to draw down on the Bank of Mum and Dad's cash savings.
Tembo is on a mission to help more people buy their first home. We get first-time buyers on the ladder with the help of a 'booster' - usually a parent or grandparent willing to lend a hand. In doing so, we can unlock marketing leading interest rates and products, saving up to 40% in interest charges. If you would like a free initial call with one of our advisors to discuss any of the options above, please complete a Tembo plan and then book yourself in!
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