As you get a little older, it’s natural to want to see your kids settled and not struggling with life’s basics.
But one financial pillar younger people are finding harder to secure than previously is purchasing a home. In fact, the average first-time buyer today is aged 30 — seven years older than in 1960.
For many, the main stumbling block is saving enough cash for a mortgage deposit — statistics from the Nationwide Building Society reveal that a 20 per cent deposit in London is now £80,000 and elsewhere in the UK it’s around £20,000. Across the nation, this sum typically takes between eight to 10 years to save for.
Home’s where the heart is, but nowadays your children must overcome several hurdles on the road to owning a house.
Here’s an overview of the situation and information on how you might help them.
Housing Generation Gap
It’s tricky to pick apart why the younger generation are facing different financial challenges to their parents, but examining a few key factors sheds light on the situation.
Data from consumer gurus Which? reveals that in 1977, the median amount first-time buyers borrowed was £8,376, which was less than double the average income of the day. But the same group today borrows an average of £137,000 — 3.58 times their annual household income. So in simple terms, there’s now a much wider gap between the amount first-time buyers earn and what they have to borrow.
And although general living standards today are higher than ever, flat-lining wages and rising house prices mean that Millenials are poorer than previous generations — while a historically high UK housing shortfall of 4 million homes (according to Heriot-Watt University research) further compounds the problem.
How can I help?
The scenario’s problematic, but there are several potential solutions. You should always talk to a qualified mortgage or financial adviser before splashing cash on any rescue plan to help your children buy a home. But the following information provides food for thought.
Shared ownership – through the government’s Help to Buy scheme can offer low, 5 per cent deposits that are much easier to save for.
No interest is applied to the loan for the first five years, but it’ll increase each year after that point. And because the amount needed to repay isn’t fixed but based on a percentage of the value of the property, if the value of the home rises, you’ll pay back more than you borrowed. Furthermore, it only applies to new build houses, which narrows down the choice for your children.
A guarantor mortgage is another option – through you acting as a guarantor on their debt, your children can access larger loans than they’d be offered on their own. Parents usually use their own home as collateral and if your children maintain the repayments, you’ll pay nothing. But if they default, there are serious consequences — you’ll have to pay the shortfall and in a worst-case scenario, could end up having your home repossessed to facilitate debt repayment.
If you can unlock cash – through a secured loan or equity release, gifting money to your children for their home deposit might be the most straightforward plan.
The rules on gift exemptions allow parents to give up to £5000 to children as a one-off tax-free civil partnership or wedding gift. And separately, the annual tax-free allowance limit for each parent is currently £3000. If you haven’t used last year’s allowance, you and your spouse can each give £6000 tax-free, equating to a £12,000 deposit pot. But you should be aware that your children will be charged Inheritance Tax if the total amount exceeds £325,000 in the seven years before you pass away.
So there’s light at the end of the tunnel if you’re a caring parent keen to help your child get the keys to their first home.
Just remind them that in return, you’ll expect a perpetually warm welcome with cakes and tea on tap whenever you pop round.
Unlocking cash can be the key to giving your family a helping hand — keep an eye on our blog for further interesting lifestyle articles.