Rents in the UK rose by over 8% in the year leading up to October 2021, taking the average monthly rent outside London to £888. For many people, this makes saving the deposit for a house purchase a remote possibility. Simply too much of their income goes on keeping a rented roof over their head.
Parents with grown-up children often fill the financial gap – either by dipping into savings, or by extending the mortgage on their home. If you have the financial security to do this – and offer your children an opportunity to get on the housing ladder by paying their deposit – it makes a lot of sense.
Nearly one in four first time buyers get financial help from their parents. There are, however, a few considerations.
Gifting a Deposit
In theory, a gift is the simplest option. If your son or daughter declares the gift within the sources of funds to support their purchase, their mortgage lender may ask for formal documentation including a declaration that you will have no financial interest in the property. They may also ask for proof that you’re in a position to provide the deposit funds.
Sometimes people decide that although they can spare the money at the moment, they might need that capital for their longer-term financial planning or retirement. One option is to provide the money as a loan, with terms and interest rates agreed between the two parties.
Loan repayments can be formalised through a formal mortgage deed or loan agreement drawn up by a solicitor. How you feel about this will depend on your relationship.
A loan though will not act as a disposal for tax planning purposes as you are still entitled to that money.
Will You Own Any of the Property?
Alternatively, you might be prepared to wait until the property is sold at a future date to get your money back. In this case, it’s recommended that you enter into a declaration of trust which is a deed drawn up to give you a share of the property based on your financial contribution. This will protect the value of the money you put in relative to the property market as the share you receive is based on the percentage share of your initial contribution. However, that share value may fall if house prices fall.
A trust is also recommended if your son or daughter is buying a home with somebody else and you’re providing the deposit. Otherwise, if they part ways and the house is sold, your contribution is divided between them.
If you take out a loan secured against your existing property – for example by extending your mortgage – you need to be certain you can meet the payments. Never put your own home in jeopardy.
Equity release is another option. This is a complex area and you should definitely take professional advice first as well as speak with your children so that they are aware.
Many parents are pleased to be in a position to help. But it makes sense to take advice to ensure that your interests are protected.