Buying a house with help from your parents
So you have read all the press articles telling you it is cheaper to buy than to rent… but how do you make that enormous financial decision to buy your own home, particularly if you can’t raise at least a 10% deposit?
Many of us could be saving hundreds of pounds by buying a property rather than renting. The average mortgage is now apparently up to £400 per month cheaper than the average rent in certain areas.
Well, with the average first time buyer needing at least a £16,000 deposit, it is not surprising that parents are now assisting many of us to buy.
The problem is that potential borrowers with small deposits face the most problems as mortgage lenders who were badly burnt a few years ago during the financial crisis no longer allow borrowers to overstretch themselves.
However, if you have decided to buy your own home, parental funding of your deposit is the simplest way forward. Mortgage lenders prefer deposit money to be gifted rather than loaned and usually ask for a letter from the parents confirming that the money will not need to be repaid.
The downside of lending money for a deposit, as opposed to gifting it, is that most mortgage lenders will take the loan repayments into account when working out how big your mortgage can be. This means that you may end up being able to borrow less than if the money had been a gift. Parents should also be aware that when the loan is repaid, they will have to pay income tax on any interest they have charged you.
If parents die within seven years of making the gift, the money will be treated as part of their estate for inheritance tax purposes. However, parents can give up to £3,000 a year which won’t be counted for inheritance tax. Also in any year when you get married, they can give you a further £5,000.
If your parents are giving you money and you plan to buy with a partner, it is worth considering what will happen to the gifted money if you split up. Deeds of Trust can be drawn up by a solicitor and these will record how the equity (spare cash) in the property should be divided up in the event of a relationship breakdown.
Alternatively, if your parents are still working, you could take out a joint mortgage with them, which means all of you will be named on the deeds and you will all be jointly responsible for the mortgage repayments. A joint mortgage should make it easier for you to obtain a mortgage in the first place and to borrow a larger amount than if you bought in your sole name. In this scenario, the length of your mortgage will depend on the ages of your parents. Many lenders don’t like mortgages which last beyond the 65th or 70th birthday, so your parents should be around 40-45 years old for the typical 25 year mortgage to be taken out.
A Law Plain and Simple Guide
Author: Joe Cunningham
Woollcombe Yonge Solicitors