Is remortgaging the best way to help your child get on the property ladder?

Is remortgaging the best way to help your child get on the property ladder?

When your child is ready to fly the nest, this may be easier said than done. With high property prices, large deposit requirements and strict affordability criteria to contend with, buying their first home isn’t an easy goal to achieve. It’s only natural that you want to help them get on the property ladder and one way to do this is by remortgaging.

How remortgaging can help your child

If you have equity in your property, you can remortgage to release it. This gives you a lump sum that your child can use as a deposit. Remortgaging is a good way to provide help with a deposit when you don’t have adequate savings to use.

A popular choice when releasing equity is a lifetime mortgage. The cash sum released is tax-free and the mortgage loan isn’t repaid until you either move into long-term care or pass away. The interest is usually compounded and repaid along with the loan although you can choose to make monthly interest payments on some plans.

Considerations before remortgaging

Whilst remortgaging is a great way to provide your child with their first-time buyer deposit, there are factors to consider.

  • If you’re not using a lifetime mortgage to release equity, you’ll still have to make monthly repayments and these will be higher than your current ones. Consider how this will affect your financial situation and your standard of living.
  • An alternative to paying higher repayments is to increase your mortgage term. This means that you’ll have to continue making monthly payments for a lot longer.
  • If you opt for a lifetime mortgage, the compounded interest will increase the overall amount owed. This will reduce the value of your estate, meaning that there will be less to leave to your beneficiaries.
  • Check whether an early repayment charge will be applied by your lender. If so, this may be a significant amount.
  • There are other costs to bear in mind when remortgaging. These can include an exit fee to leave your current mortgage deal, an arrangement fee to set up your new mortgage deal, a valuation fee and legal fees.

Alternative ways to help your child

If you’re not sure whether or not remortgaging is the right option for you, there are alternatives to consider.

A guarantor mortgage

With a guarantor mortgage, you guarantee the repayment of your child’s mortgage. This means that you are legally liable to make the mortgage repayments if they fail to do so.

A family springboard mortgage

For a family springboard mortgage, you usually have to put funds equalling 10% of the property’s value into a savings account that’s linked to the mortgage. The savings are held in the account for a set term, such as 3 or 5 years. You earn interest on the savings and, assuming no repayments have been missed, the funds are returned to you at the end of the set term.

A family offset mortgage

A family offset mortgage also involves putting your savings into an account that’s tied to your child’s mortgage. The amount of savings held in the account is offset against the outstanding mortgage balance. The interest charged is calculated on the difference, which reduces how much your child has to pay each month.

A joint mortgage

You and your child can have a joint mortgage. The affordability is calculated on both of your incomes. You are both named on the mortgage and the deeds. If your child is unable to pay their share of the mortgage, you will be responsible for paying it.

If you already own a home, the property owned with a joint mortgage will be classed as a second home. This means that you’ll be liable for the stamp duty surcharge. You may also be liable for capital gains tax if, as your second home, the property is sold and you’re still named on the mortgage.

A joint borrower sole proprietor mortgage

A joint borrower sole proprietor (JBSP) mortgage is very similar to a joint mortgage with one main difference. Although you and your child are legally liable for the mortgage repayments, your child is the only one named on the deeds. This means that you won’t be liable for the stamp duty surcharge.

A gifted deposit

A gifted deposit is a common way to help your child get on the property ladder. The lender may need proof of where the funds have come from. You’ll usually need to provide written confirmation that the funds have been given as a gift and, therefore, you don’t expect them to be repaid. You’ll also have to confirm that you understand you’ll have no financial claim over the property.

Get expert advice on how to help your child get on the property ladder

There are many ways that you, as the Bank of Mum and Dad, can help your child to buy their first home. Remortgaging is a good option if you have equity in your property but you need to consider the financial impact it will have on you. Give our mortgage brokers a call on 01322 907 000 to discuss all of the options available to you. They can also advise you on the various schemes that your child may benefit from as a first-time buyer. For example, the First Homes scheme. Talking through the options with an expert will help you to make the best decision for both you and your child.