How to get your kids on the property ladder
Zoe Taylor MSc Finance, FPFS, LLAA
A refreshingly enthusiastic approach to managing your finances.
Increasing life expectancy and major social change mean many families need to reconsider how their wealth can work harder for the benefit of the whole family.
We are now witnessing a phenomenon where the ‘baby boomers’ – those born in the post-war era and approaching retirement – represent the wealthiest generation in our society.
However, whilst they enjoy the fruits of their labour, they are also sandwiched between elderly parents facing the challenges of old age and children struggling with the hangover of university debts and spiralling house prices, coupled with rising interest rates and tightening lending criteria.
Challenging the norm
Traditionally, wealth has passed from one generation to the next upon death.
However, intergenerational wealth management challenges that notion and looks at how families can use their wealth more collaboratively to support each other during their lifetimes. This offers legitimate estate planning and tax mitigation opportunities, whilst providing the much-needed assistance to alleviate the financial burdens of everyday life.
Getting onto the property ladder
The difficulties facing younger people in joining the ranks of home ownership are well-reported, with renting often now stretching well into one’s thirties or beyond. Consequently, an increasing number of parents and grandparents are stepping in to help children onto the housing ladder.
There are a number of ways to do this: gifting, loans and providing security to mortgage providers are all worth consideration, and many of these solutions have the dual advantage of helping with effective estate planning.
However, caution – and advice – needs to be taken when considering which option to take to ensure that no unexpected tax liabilities result from this act of generosity.
Want to help, but can't part with cash or savings?
It is a fine line between making sure you are comfortable in your retirement,and helping your family, particularly as we are all living longer than ever before.
This can cause a bit of an issue when it comes to gifting, as you might also need the funds yourself. Some people also have concerns that in the event of a divorce, an irrevocable gift has been made to a couple (perhaps a child and their spouse) and the money might be split out of the 'bloodline'.
One option could be using the equity in your own property, or an unencumbered buy to let property, to help boost a loved one's deposit.
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For example;
Jane has a main residence worth ￡500,000, and her mortgage is now paid off.
She has some pensions and savings of her own, but is reluctant to spend them as she's only recently retired.
She can't see any point in waiting until she's died to help her family financially, as she would prefer to see them enjoy it, and her mum lived until she was 90, so she feels it's likely that her daughter would be nearly 70 before inheriting, which isn't particularly helpful! She also has an inheritance tax liability.
Her daughter, Emily, lives in Edinburgh where house prices are really high, and she is struggling to save a substantial enough deposit due to the cost of rent.
Emily has managed to save around a 5% deposit, but at a 95% LTV the interest rates and mortgage payments are both high and not particularly affordable.
Jane mentions this at her annual review, and we talk about the face that she could help by securing some of her own property against Emily's, which will effectively increase her deposit and allow her to reduce the interest rates by improving the LTV to 75%, and reduce her mortgage payments dramatically.
The charge against Jane's home will be lifted once Emily has paid enough against her new home to obtain a similar LTV, or after a set amount of time.
In the meantime, the charge also reduces Jane's estate for inheritance tax purposes.
This is just one of the available options, which can include;
It is worth speaking with someone to consider how you can help your family get on the property ladder.
The home on which the mortgage is secured may be repossessed if payments are not kept up to date.
If considering providing security to mortgage providers we recommend the guarantor gets legal advice to ensure they fully understand their obligations regarding the mortgage.