It’s instinctive for parents and even grandparents to want to give their kids money to help them on the ‘ladder’. But it’s not something anyone should do lightly and it’s important to remember that one of the reasons property prices have been able to rise to the level they are now is because parents have enabled their kids to buy homes, despite high prices, by giving them the deposits to do so.
Without this help, it’s quite possible that prices wouldn’t be able to have risen at the rate they have to date. Since the millennium we’ve seen the relationship between wage growth and property price growth almost disappear, as the younger generation were able to carry on buying even though house prices were rising, because of parent’s help with deposits, as well as ‘cheap money’ which meant mortgage rates were at a low of 5-7% since 2000 and at the moment are as low as around 3%.
If you are thinking of either giving money or taking money for a deposit, here are some things you need to consider:-
Can you really afford it in the long term?
You may have had a pay-out from something such as a pension or inherited some money yourself and now want to pass this onto your kids so they can get on the housing ladder. But what if you need that money later in life? What if you end up in a nursing home which drains all your cash – unfortunately the local authority can pursue people you gave money to before they help with your care costs.
Check with a financial advisor prior to giving any money away.
Should you really be trading down now to release equity?
Some people look at selling up a larger property to trade down so they can release equity for their kid. This can be OK, but what happens if you need to move again to release money for you? Could you be selling a property which would have otherwise grown in value? Would equity release be a better option? Maybe it would be better to split the property in two to allow your children to have one half and you the other, or add more space to your existing property to accommodate both families.
Check the best way to fund the deposit
It might be better to take a share of the property rather than just gifting the money, making sure there is money there you can get back later on, with the added bonus of an uplift in value if prices have increased.
Be honest with brokers and lenders
Lenders need to know where money for deposits has come from, so your kids or you must make sure it’s declared on the right forms.
What is the best way to ‘give’ the money to your kids?
There are lots of myths about ‘signing over your property to your kids’ or giving them money and if you survive 7 years, then it’s free of inheritance tax. This simply isn’t true – especially if you are living in the property you ‘gift’.
Seek help from a qualified independent financial advisor so together with an tax expert they can find the most tax efficient way to hand over money or property to your kids.
If you need help from a financial advisor, then do contact us so we can put you in touch with one who understands property and finance.
I hope the above information is useful food for though, but contact us if you need more help. You can sign for our First Time Buyer checklists For more help with buying your first home, visit our FTB checklists.
And don’t forget to come and have a chat with me at the First Time Buyer Show Saturday 10th May 2014.
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