It’s a tough time for those looking to buy their first home, with eye-watering property prices and some of the highest mortgage rates in over a decade.
With the Bank of England’s base rate climbing higher, interest rates on mortgages are following suit, meaning that it’s exceptionally difficult for first-time mortgage customers to find an affordable fixed-rate deal.
Despite mortgage rates dropping slightly following a slowdown in the rate of inflation, the average rate for a two-year fixed deal remains above 6%. This means that someone starting a deal at the current average would pay over £9,000 more over the course of their term than somebody starting one just two years ago, when the average two-year rate sat at 2.59%.
Not to mention, between skyrocketing rent and the income squeeze from the cost of living crisis, it’s a particularly challenging time for young renters to be building up enough savings for a deposit.
While it’s not unheard of for parents to help their children with a deposit so they can apply for a mortgage, some adult children are having to turn to parents for help with mortgage payments as well.
Around eight in ten (79%) of middle-class parents are helping their children in some way financially, according to new research from wealth management company Saltus, with one in four in this group helping cover mortgage payments and one in five rent.
One in five of those questioned (22%) said they have sacrificed their own financial stability to offer their children financial support.
Mike Stimpson, Partner at Saltus, said: “Our research shows just how much financial support adult children need in the current climate, and the lengths to which their parents are prepared to go to help them.
“Traditionally, parents have helped out their children with deposits on houses, and other investments that grow with them, but now, we’re increasingly seeing clients forced to bring those investments forward to help their children with everyday costs such as mortgages and household bills.
If you want to help your children get on the property ladder or tackle rising mortgage rates, there’s a few ways you can do so. However, remember that mortgage rates are very high at the moment, and don’t show signs of slowing down for a while. Don’t enter into any of these arrangements without serious thought, and consider speaking to a mortgage advisor to review you and your child’s options before taking any action.
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
Guarantor mortgage
With a guarantor mortgage, you would be volunteering to cover any repayments that your child fails to make. Your name won’t be on the contract for the property and you won’t own any share in the home, but it can help your child access a mortgage if they have a weaker credit score, or help them secure a bigger mortgage than they could usually get on their own.
Ideally, of course, your child should be able to keep up with mortgage payments themselves, but as a guarantor, you effectively provide a safety net if their income is suddenly affected and they find themselves unable to.
The main downside of a guarantor mortgage is that it is typically secured against your own property or savings, meaning that if you can’t make repayments either, your own assets will be at risk. If you are considering offering to be a guarantor for your child, you should make sure that you fully understand the potential risk to your own finances.
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
Family offset mortgage
For a slightly safer option than a guarantor mortgage that will still help your child pay off their mortgage, you could consider a family offset mortgage.
This allows you to place a certain amount of money into a savings account that is linked to your child’s mortgage. The mortgage balance is reduced by this amount, meaning that your child’s interest payments will be lower.
For example, if you deposited £30,000 into a savings account linked to your child’s £150,000 mortgage, then the mortgage balance would reduce to £120,000. If your child’s deposit was £15,000, then the mortgage would go from a 90% LTV (loan-to-value) ratio to 87.5%, reducing their repayments as a consequence.
You can usually access your savings after a period of three to five years once a proportion of the mortgage has been repaid, meaning that this is still a significant financial commitment.
You should also be aware that your savings will not accumulate any interest in a family offset account. However, your savings will be returned to you after your child has repaid the amount required by the lender.
Joint buying
An alternative option, if you are fully prepared to contribute significantly to your child’s home buying costs, is to think about taking out a joint mortgage with them.
This means that both your income and your child’s will be taken into account during the application process, which may increase your child’s options and the size of mortgage they can afford.
If you are approaching retirement, take into account the fact that your income will likely change significantly when you stop working. Your lender will consider this too, and it may impact how much they are willing to lend you.
Gifting from your savings
Arguably the simplest way to help your child make a property purchase is with a direct financial gift from your savings, perhaps to put down a deposit. After all, many people find they have enough income to cover mortgage repayments, but not enough savings to put down a deposit upfront.
Of course, there’s a few downsides here, most notably that you’ll be losing out on interest from taking the money out of your savings. Additionally, if you die within seven years of making this gift, then it will be subject to Inheritance Tax.
You should only be prepared to give away as much as you can comfortably afford. If you are giving them the money with the expectation that they will pay it back eventually, bear in mind that this could take a while, and you won’t see any interest from it.
Equity release
If you are aged 55 or over and own your home outright then you could consider equity release as a way of freeing up some cash and giving it to your child to help buy a property.
There are several benefits to equity release – it allows you to access some of the value of your home upfront while still getting to live there, and you won’t have to make monthly repayments.
However, on the other hand, it will likely mean that your own property is sold when you die or move into long-term care in order to pay back the loan, so it won’t be included in your estate.
You can read more about equity release and whether it’s right for you in our article Can I take money out of my property to give to my children?
If you’re looking for somewhere to start, you can get expert advice from an independent equity release specialist with Unbiased. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
Find out more
You can read more about some of these options and find out other ways to help your child with the costs of home ownership in our article Nine ways to help your child buy a home.
On the other hand, if you have a mortgage and you’re struggling to cover steeper payments, find out what your options are in our guide What can you do if you can’t pay your mortgage?
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