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21st October 2016
Family, Home, Money
Many people who are heading towards retirement will be considering what to put in their wills, and helping out younger family members and friends is often a strong priority. House prices are constantly on the rise, and it’s becoming increasingly difficult for the younger generation to buy their own property. Attaining a mortgage is now a complex process, and many choose to rent for years on end over purchasing a house.
For those who are in a position to buy their own house, it’s often thanks to “the bank of mum and dad” or their grandparents that they are able to do so. As well as this new accepted norm, it’s become increasingly popular for the older generation to help out through schemes such as gifting, and leaving inheritance. If you’re considering helping a loved one make their first steps onto the property ladder, here at Asda Money we’ve put together some of the best ways you can go about it.
In the current mortgage market, first time buyers usually need at least five per cent of a property’s value to be able to get a mortgage. This is just the minimum amount, and it’s recommended to put down a bigger deposit if possible, to get better mortgage deals and avoid falling into negative equity. However, it can often prove a struggle for young people to save for a deposit on their own, which is why gifted deposits have become a popular way for family members and friends to help out.
A gifted deposit is when someone gives a sum of money towards a homebuyer’s deposit. They can gift the whole deposit if they wish, or just a small amount. Although it’s possible for friends to gift money towards deposits, lenders usually prefer direct family members, which is why it tends to be parents or grandparents who play the biggest part in the gifting process.
The important thing to remember is that because the money is a gift, there’s no agreement for the homebuyer to pay back the money. If you’re intending on gifting a deposit, you’ll need to provide a written, signed declaration to the lender which clearly states that the money is a gift and you’re not expecting any form of repayment.
It’s recommended to seek independent legal advice when it comes to gifted deposits, so that it’s completely clear that you have no interest in the property and no right to claim your money back. Legal advice is also a must if you are intending to get some of your money back if the property is sold later down the line. Remember, you’ll need to provide an official form of photo identification to both the solicitor and the lender, such as a passport or driving license. This enables conveyancers to gain evidence of where the money is coming from, and also run anti-money laundering checks.
A guarantor mortgage is another way to help somebody to get on the property ladder. If you’re happy to act as a guarantor in case the homebuyer misses any mortgage repayments, it usually means that they’re able to take out a bigger loan.
Typically, you’ll be bound into the agreement until whoever you are acting as guarantor for has repaid a certain amount. This will need to be enough to lower their “mortgage to loan ratio value” to a level that the lender is satisfied with. This is usually at least 80 per cent of the loan to value ratio. A common way to act as a guarantor is for the parents or grandparents to offer their own homes as a form of collateral on the mortgage, as long as they have around twenty-five percent equity in the property.
If your child or grandchild keeps up their mortgage repayments, acting as a guarantor can allow you to help without you having to actually pay anything. However, there are obvious risks, as you’ll be liable to make up the costs if they can’t make any of the payments. If the worst happens, you could end up having to re-mortgage your home or could even be subject to repossession, so make sure you take care over your decision and are in the financial position to make any repayments if needs be.
According to the housing charity Shelter, one in six people aged between 25 and 34 relied on inheritance from a relative to buy their own house in 2015. Although it might seem depressing to think about the money you’re going to leave behind in your will, it’s always good to plan ahead. This way, whoever you leave your inheritance to will be more likely to use it for something useful, such as a house deposit.
Remember, any money that you leave behind will be subject to inheritance tax at a rate of 40 per cent, unless it’s below the £325,000 threshold. One way to minimise the impact of inheritance tax is by gifting your property whilst you are still alive. So long as you live for seven years after you initially make the gift, the property shouldn’t be counted as part of your estate after you die. This way, your family, or whoever you leave your estate to, can still gain the benefits without having to pay as much in inheritance tax.
Another way of cutting your inheritance tax is to use a trust. When you put your money or property into a trust, it’s a legal arrangement where someone else (the trustee) will look after it for a third person (the beneficiary). Therefore, as the money, property, or investment isn’t technically yours any more, it might not count towards your inheritance tax bill.
A trust is a great way to leave money to your children or grandchildren to help them buy a house, because the trustee can make sure they use the money responsibly. For example, if you decide that the beneficiary shouldn’t gain access to the trust until they are a certain age, it’s up to you to make the rules when you initially set up the trust. Many beneficiaries won’t be able to access their trust until they are at least 18 years old or even older, as whoever left them the money may have felt that they needed to be old enough in order to spend it in the right way.
Trust law can be complicated, so it’s always recommended that you seek professional advice to make sure you get things right. This way, whatever you leave behind as inheritance will be used in the best possible way.
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