There are now several ways of helping younger family members to purchase a property - and differences between them are significant.
The term ‘generation rent’ was coined to describe today’s struggling young adults. Yet there are a growing number of ways to help young relatives obtain a first mortgage.
Caught between soaring house prices and flat earnings, Millennials (those born between 1981 and 2000) may become the first generation to record lower lifetime earnings than their predecessors, according to Stagnation Generation, a recent study by the Resolution Foundation and the Intergenerational Commission1.
Today’s 27-year-olds are earning the same as 27-year-olds did 25 years ago, the study says. It adds that a typical Millennial has earned £8,000 less during their twenties than those in the preceding generation, known as Generation X.
Even as incomes stagnate, housing has become much more expensive. The study points out that 30-year old Baby Boomers (those born soon after World War Two) were 50% more likely to own their own home than today’s 30-year old Millennials.
In terms of interest rates, mortgages today are more affordable than ever, but high house prices and tough loan-to-value ratios at lenders have made deposit sizes too big for many Millennials to afford.
Between 2005 and 2015 the proportion of 25- to 34-year olds buying with a mortgage fell from 54% to 34%1. Enter the Bank of Mum and Dad. This year, parents will hand over more than £5 billion to their children for the purpose of buying a house2.That sum is enough to rank the ‘Bank of Mum and Dad’ as one of the UK’s top 10 mortgage lenders.
Parental support will help to secure 300,000 mortgages in 2016 and lead to home purchases worth £77 billion2. The average contribution is £17,500 and, in 57% of cases, it is not a loan but a gift. This change in wealth and earning patterns is also shifting attitudes to passing money through the generations.
Many of those born before the Second World War (the parents of the baby boomers) still want to leave their money to their families on death.
“For them, born as they were in the 1920s and 1930s, it has always been about saving for the future,” says Ian Price, St. James’s Place Divisional Director. “But the baby boomers want to help their families today, rather than leaving all their wealth as an inheritance.”
For some aspiring homebuyers, family support can mean the all-or-nothing difference between buying and renting – or just the purchase of a baby-friendly two-bed instead of a one-bed. To help a young relative in this way, gifting may be the most straightforward option, whether by using your cash savings or by borrowing against your investments.
It does mean you would immediately lose control of the gifted money, and the gift could have implications for Inheritance Tax. In fact, you may prefer not to gift a sum of money outright, but instead to support a younger relative by providing extra mortgage security. A ‘secured deposit’ reduces the interest rate on the mortgage, and therefore the level of monthly repayments. But the deposit will not be accessible until the mortgage is renegotiated or paid off, and is at risk if the repayments are not kept up.
A third way of helping with the mortgage is to apply for the mortgage jointly with the young relative. Under this approach, the lender would factor the older relative’s income into its affordability assessment, potentially offering a mortgage to both parties – the older signatory would be liable for any missed repayments.
Better still, certain banks do not require the joint applicant to be registered on the title deeds, meaning you don’t own the property and it is not included in your estate. This is crucial to avoid exposure to Stamp Duty and any other tax implications of buying a second property.
While getting on the property ladder is becoming increasingly difficult for Millennials, there are at least a number of opportunities for families to offer a helping help.
1 UK Government English Housing Survey, 2016
2 Legal & General and the Centre for Economic and Business Research, 2016
The home on which the mortgage is secured may be repossessed if repayments are not kept up to date.