Saving for a deposit to buy your first house can seem like an impossible task, especially as most mortgage lenders require a 10% deposit and the average house price in the UK is now £200,000. This means saving £20,000 before you could even consider choosing a new home.
The key to building up a deposit is, quite simply, to start saving as much as you can as soon as you can.
Following the recent economic downturn, nearly one in five first-time buyers is relying on the bank of Mum and Dad to get them on the property ladder. Parents and grandparents are increasingly being called on to step in to help younger family members buy their first home. According to recent research, first-time buyers now need to save for an average of eight years to fund the deposit. Those in London must wait even longer and even though wages tend to be higher in the capital, property prices are proportionally still much higher.
Research shows that around 60% of first-time buyers get help from parents to buy their first home and it can make a lot of sense for everyone concerned. However, it can also be fraught with difficulties. Parents who want to help their children buy their first home and, at the same time, become financially independent, should think very carefully about how they should provide financial support. Older family members need to be sure that they are not putting their own security and future retirement comfort at risk. You must think through the consequences and take appropriate advice.
But what can you do to save that money? And what other options are there?
It may sound obvious but you can just save up for it. Granted, it may take many years to raise that sort of money, especially as wages are relatively stagnant at the moment. If you do decide to save, try and find a bank account with a good interest rate to help boost savings.
Borrow From Family
Many mortgage providers will accept your deposit if it has come from family, but they prefer it to be a “gift” rather than a loan. This means you don’t have the burden of having to pay it back as well as paying back a mortgage.
The larger the deposit that a would-be house buyer can put down, the better the mortgage rate that he or she will be offered. Mortgage lenders usually ask for a letter from parents confirming that the money does not need to be repaid.
However, if parents are giving some money to help with the deposit for their child to buy with a partner, it is worth considering what will happen to the money if the parties split up. Consideration needs to be given to how the equity in the house should be divided should the parties end their relationship. Parents should also ensure that they remain financially secure in the future. Whilst parents may be financially secure at the moment, what happens when they come to retire? Things can be very different and circumstances can change very quickly.
There are also taxation implications. If a parent does make an outright gift and the parent dies within seven years of handing over the money, the child may have to pay inheritance tax. Likewise, a parent may have to pay any capital gains tax if money is lent with interest and the value of the property increases.
Loaning Deposit Monies
If a parent is lending rather than giving money then it is vital to get that established in a formal legal document to prevent confusion and distress if circumstances change.
Problems could arise if a parent dies and the surviving spouse needs the money back to live on or to pass on to other children to meet the terms of the dead parent’s will or the marriage or relationship of the child breaks down.
Consider one scenario. Frank lends £150,000 to his son, Tom, to buy a home with his new wife who he has only been dating for a few months before the marriage. Frank has not yet drawn up a will. Tom dies tragically in a car accident. The money automatically passes to his wife, Catherine, despite the fact that Frank and Tom had intended it as a loan. A tragic event was not foreseen but the financial implications could have been avoided if advice had been taken beforehand and a document drawn up to give effect to the parties’ intentions.
The document does not have to be complicated. It must contain a clear and simple statement of effect so long as it is signed by all parties. It should state:
• the basis on which the loan has been made;
• what will happen to the money if one of the parties dies, the child and spouse or partner split up or if the parent needs the money paid back?
Clearly it is simpler if lending to a single child. However, clear documentation must be produced as circumstances change and people fall out. It is cheaper and less traumatic to deal with at the outset with a legally valid document rather than waiting and potentially ending up in court.
Borrow From Friends
Like borrowing from family, the banks prefer it to be a gift rather than a loan. However, you have to be careful when borrowing money from friends.
If you do decide to borrow from friends, or family, it’s really important to put something in writing stating what has been agreed to protect against unforeseen events. Friends and family can fall out, circumstances change and people die. This is where a property lawyer can assist. A simple document can be prepared.
Take Advantage of Government Schemes
The UK Government has a few different schemes you could consider. For example, First Buy is a scheme that loans first-time buyers up to 20% of the price of a new home. This would mean you would only need a 5% deposit. Most First Buy loans are only available on new build properties but they are only repayable once you sell your home. The other scheme is Help to Buy, which is offered by lenders in England on both new and existing properties, offering mortgages with only a 5-10% deposit.
Always read the terms and conditions of the schemes carefully. A property lawyer will be able to advice on the schemes if you instruct them on your house purchase.
Find a Guarantor
If borrowing from friends or family isn’t an option then some banks will give you a mortgage without a deposit if you have a guarantor. This is someone who will vouch for you and is willing to shoulder the risk should you miss a repayment. It's important to remember that you need to find a guarantor who is aged 18-75, hasn't had trouble paying their bills in the past, and can comfortably afford the repayments if ever something happens that means that you're unable to pay.
This is quite a big risk for most people as it means that they put their house on the line if you aren’t able to keep up your mortgage repayments.
However, on the plus side, because of the additional security a guarantor offers, mortgage lenders are sometimes willing to lend more than if they did not have a guarantor. Think carefully about any arrangement and do not undertake anything without specialist advice. You must be absolutely clear about how much you are guaranteeing and what the risks are. Be particularly careful as your own home could be put at risk. If you are considering a loan guaranteed via a charge on your home, make sure that the amount of guarantee is capped. This means that your liability cannot exceed the original agreed amount.
Buy Part of a Property
Shared ownership can often mean that you don’t have to raise quite as much money as if you were buying a property outright. It involves purchasing part of a property and renting the rest, and although you would not own 100% of the property outright, you would be getting a foot on the property ladder.
You still need a deposit to get a mortgage but as you would only need to borrow a percentage of the property value, the amount you need is much less. For example if you wanted to get a 90% mortgage on a 50% share of a £150,000 house you would only need a £7,500 deposit, rather than the £15,000 if you wanted to buy it outright.
Clearly, obtaining legal advice from the outset is an essential prerequisite to entering into any financial arrangements with friends and family to fund a house purchase. No matter what you decide to do to get your deposit, be it entering a Government scheme or borrowing from family, you should obtain legal advice when you buy a property and have a simple document drawn up. A friendly agreement can soon turn sour and if you don’t have anything to back up what you agreed, it could quickly destroy any relationship that you had.
If you need legal advice about drawing up contracts with friends and family, or need a property lawyer for your house purchase, call the property team at Slater and Gordon. Call us on freephone 0800 916 9083 or contact us online and we will call you.