Aspiring homeowners often face a struggle to secure a deposit. It’s a challenge that may be affecting your children and grandchildren. But there are things you can do to help them get on the property ladder in 2020 and improve their financial security in the future.
The good news is that research from Post Office Money suggests first-time buyers are saving a deposit quicker. Yet, it’s still taking an average of 3.6 years to save the lump sum required to act as a deposit. When you look at the sums involved, it’s not surprising that first-time buyers are taking years to save. The average deposit for a first home in the UK now stands at £43,585. This varies significantly between regions. The lowest average deposit for first-time buyers is £21,696 in Blackpool. This compared to £170,003 in London. First-time buyer households are putting away £843 a month when building up a deposit. This is the equivalent of 21% of their combined income. They’re taking a number of steps to achieve their goal, including:
- Working overtime (33%)
- Selling items online (25%)
- Finding a new, higher paying job (18%)
- Using credit cards to cover everyday expenses (15%)
However, just 29% of first-time buyers did so without financial support. With huge growth in property prices over the last couple of decades and more stringent checks from mortgage providers, more people are turning to the Bank of Mum and Dad (or even grandparents).
Why help first-time buyers with a property deposit?
Where possible, lending a helping hand with a property deposit can get loved ones on track for financial security.
In many cases, mortgage payments are lower than rental costs. Providing support to help children or grandchildren get on the property ladder that bit quicker can improve their finances immediately. It’s a step that can improve their financial security in the long term too. Being able to start paying off a mortgage sooner can help free up income later in life.
Helping the next generation secure their deposit
Do you want to help the next generation get on the property ladder? There is more than one way to do it.
1. Gift loved ones a deposit
The most common way parents and grandparents are helping the next generation is by gifting a deposit.
According to Legal and General, the average contribution towards a deposit is £24,100. In total, the Bank of Mum and Dad is estimated to have lent up to £6.3 billion in 2019 alone. It’s a gift that can make the dream of homeownership a reality.
But you need to assess the impact on your own finances here too. How would taking a lump sum out of your current wealth affect you in the short, medium and long term? Could it mean that retirement aspirations are no longer feasible? Speaking to a financial adviser can help you understand the impact of gifting a home deposit. It’s a step that can give you peace of mind as you help loved ones purchase their home.
2. Loan the money needed
When gifting isn’t an option, loaning a deposit can be an alternative. If the money isn’t needed now but will be in the future, it’s an option that may be right for both you and your loved ones.
It’s important you take both financial and legal advice if this is an option you’re considering. Remember, circumstances can change and having a formal contract in place can provide both parties with security.
3. Research family mortgages
It is possible to secure 100% mortgages, meaning homebuyers don’t need any deposit at all. However, these are often offset mortgages that need support from family.
For instance, some family mortgages allow you to deposit savings into an account earning interest which then acts as security if repayments aren’t made. Others will allow loved ones to take out a 100% mortgage if your own home is used as security.
These options can seem like a simple way to lend a hand. But it’s important to keep the risks in mind. If your child or grandchild doesn’t keep up with repayments, it’s possible you’ll lose your savings or even your own home. It’s wise to discuss with the homebuyer about what’s affordable and what financial safety nets they have before proceeding with a family mortgage.
4. Point them in the direction of government schemes
There are several government schemes that can boost efforts to save a deposit that may be right for your children and grandchildren.
First, the Lifetime ISA (LISA) can give a 25% bonus on contributions. A LISA can be opened by individuals between the ages of 18 and 40, and deposits can continue to be added until account holders are 50. Each tax year, £4,000 can be deposited, leading to a maximum bonus of £1,000 a year. Deposits can either be held in cash or invested. The drawback here is that withdrawals before the age of 60 for a purpose other than buying a home will lose the bonus and incur an additional penalty.
Second, a Help to Buy equity loan is also an option. Aspiring homeowners can purchase a new build home with just a 5% deposit, with the equity loan providing a further 20% boost (40% in London). As a result, a 75% mortgage will be needed to make up the rest. It’s a scheme that can help first-time buyers secure a property with a lower deposit and one that may have been out of reach otherwise.
However, it’s important to keep in mind that the loan will have to be repaid. This can be repaid when the house is sold or the mortgage term ends, whichever is first. Homebuyers that use the Help to Buy scheme should also be mindful of changing house prices. The amount owed is tied to the amount of equity the loan helped you buy. So, if house prices have increased, so will the amount that needs to be repaid. Interest also starts to be added to the equity loan after five years.
5. Speak to them about the process
The process of saving a deposit and buying a house can seem complex if you’ve not done it before. Simply, speaking to children and grandchildren can help get them on the right track.
When calculating how much was needed for a deposit, for example, 23% of first-time buyers took advice from an independent financial adviser. A further 10% asked a parent for help. Having someone to talk to about goals and where extra savings can be made could help first-time buyers achieve their aim that bit sooner.
If you’d like to help children and grandchildren get on the property ladder, it’s natural to have some concerns. You may be worried about how taking a lump sum out of your wealth would have an impact or want to ensure those not yet ready to purchase have some help if you’re no longer here. Please get in touch with us to discuss how you could help and the short, medium and long-term impact.