A client asked this week how they could assist their adult child to buy a house.  I thought this would be a useful opportunity to talk a bit about the options that exist for parents when it comes to helping children buy a house.

In short, there are essentially three distinct options:

• Make a gift to allow the purchase to go ahead.
• Loan money to the child to help them buy the property.
• Act as a joint mortgage applicant either by jointly buying the property or by acting as a guarantor.

Helping Children Buy A House With Gifting

With many property purchases, the sticking point is not having a deposit, which can be helped with a gift of cash.  However, you can also go further than this and make an even larger gift than necessary, which can then be used to buy the property with less of a mortgage or to cover the stamp duty that arises when a property is purchased.  Of course, by the nature of gifting, the child could also choose to use the money on something wholly unreasonable, like carpet for the bathroom.

This highlights the risk of gifting money when helping children buy a house – they ultimately get to decide what to do with the money.  As such, it is not for the  situations where you have any doubt as to the sanity (or taste) of your child.  Instead you must trust them to make sound decisions.

A gift is therefore a decision that can and should only be made where there is a great deal of trust between parent and child, including the child’s spouse where applicable. 

It’s worth remembering that gifts will still form part of your estate for seven years unless an allowance applies.  For some further information, it’s worth looking at my Beginner’s Guide to Inheritance Tax.

Helping Children Buy A House With Lending

Where a gift is not appropriate, either because of trust issues or affordability (see below) it may instead be appropriate to extend a loan to the child to help them with their purchase.  This essentially makes the capital available to them in the same way as the gift above, but without permanently committing the capital out of your own estate.  By including a repayment schedule, you can assist with the purchase whilst also getting back the capital eventually.

Importantly, it is not normal to include any sort of interest on the loan.  This is because payment of interest in that manner would be taxable as income in your name when received, which can needlessly reduce the overall value of your estate.

Finally, it is worth mentioning that the extension of a loan in this way  might still be reportable to the child’s mortgage lender.  They  would be within their right to take this as existing borrowing and reduce their offer accordingly.

As a result of these downsides, I would always recommend taking legal advice before going down the route of extending a loan to your child, as it might well be that a good lawyer can spot those sorts of potential problems before they arise.

Joint Purchase to Help Children Buy a House

The final option I will talk about in detail today is the  option of jointly purchasing a property in some form.  This might be actually taking a proportional ownership of the property and paying for that  portion or it might instead be acting as a guarantor, where you do not take any actual ownership of the property but instead promise to pay your child’s lender if they are unable to do so.  In practice, the option should allow you to help them make the purchase without any cost to yourself in most circumstances, but in the instance where your child stops paying their mortgage for any reason, you become the next person in line for the lender’s debt collection team.

Both of these options have complications, not least of which is the fact that if you are purchasing jointly or acting as a guarantor, the term of the mortgage might be limited by your remaining working life.  In other words, if you are 55 and planning to retire at 65, then any such mortgages might  be limited in term to 10 years.  For interest only mortgages this will make little difference to the monthly cost, but for capital repayment mortgages (the current norm), this could increase the monthly cost beyond affordability because the capital  has to be repaid within that 10 year term.  If interested, you can look at various mortgage repayment calculators like this one (the first one I found on Google, not a recommendation to use Nationwide).

For joint ownership, it is important to remember that the share of the property owned by you will form part of your estate for inheritance tax purposes, and additionally may incur additional Stamp Duty costs if you already own your own home.  I won’t go into much detail on Stamp Duty because that could be an article in itself, but here’s a link to the Gov.UK page on the subject.

Nevertheless, for parents with relatively young adult children looking to establish themselves on the property ladder, this is a distinct possibility.

A Brief Aside – Equity Release

Equity Release – the use of a lifetime mortgage to generate capital from your home – is inextricably linked to this question, but is actually a step before  these options.  Rather than being a means of helping children to buy a property in itself, it is a method of raising capital that will then allow you to do one of these options.  As such, I will not be talking much about  equity release here but will instead save it for a future article focused on that particular topic.

Core Principle – Look After Yourself First

Whenever you travel by air you will hear a briefing about the use of the aircraft safety features, and in that briefing you will always hear the instruction to “secure your own mask first” even when travelling with children.  The practical reasons for this are fairly obvious – if you are incapacitated because you help someone else to breathe before ensuring your own ability to do so, you can no longer help them in  any way.

A similar principle applies to financial planning when considering how best to assist children with their own finances.  In this case it is far less likely to result in death or injury, but it is still important to make sure that you can actually afford your chosen strategy without leaving yourself destitute.  After all, you children will be very grateful for helping them buy a property (hopefully), but if you do so at the cost of your own financial stability, it might be very difficult for them to assist you in return.

You can check things like whether you can afford to help children buy a house by building up a robust financial plan for your future and testing it to see how your situation changes with some stress-testing.  If you don’t already have an adviser who can help you with this, please get in touch and I can assist.