In the UK, the traditional home buying strategy has been changing for young first-time buyers and millennials. How so? They are asking mum and dad for a loan before going to the bank.
Buying a home is more expensive than ever, reaching the home price rates of 2007 all across the country. People are staying in their parent’s home longer, renting, and sharing prices with room mates over buying a house and this has actually made lending standards more difficult to reach, especially with the high deposit standards.
The average price for a first time home purchase in 2014 has risen 10.5% over 2013, bringing the price to £192,000 (with a 10% deposit around £20,000). Many of Britons young are borrowing from their parents to cover that deposit and get them started, a Shelter UK polls estimates that the average loan parents give their children at about £23,000 so those numbers match what some may expect.
If this is something you yourself are considering doing to help your child (or other family member) in their first home purchase, the below options are good ways to feel secure in this high loan expenditure without denying your child or loved one the help they may need.
1. No matter what, have your family loan written out in some sort of legal agreement. While it may seem awkward to do to your children, it can also help them learn more about different financial options, help them feel a sense of responsibility in paying you back, and also help ease any worry you may have in giving a loan to a family member. These legal documents should share how much you are loaning, if there are any below-market interest rates applied, and if there is a specific date you expect the loan to be paid out.
2. If you don’t have the funds to give the money to your child but you’d still like to help out, you have the option of taking a loan against your house and then giving that money to the family member in question. This does make your own home collateral for the loan, which is riskier if your child ends up not having the money to pay you back (due to job loss or health emergency, whatever the case may be) but it is an option to consider if you think your child is responsible enough to trust with this risk.
3. If you work with a solicitor, you can create a deed of trust with the borrower. This would mean that in return for the loan, your family member would pay you back a certain amount when they eventually sell the house. You could set a flat fee or a percentage of sale purchase, whatever you think would be the most beneficial for your loan situation.
4. If you are lending money to an only child, a Lifetime Mortgage can be used to give your child an early inheritance. This is a great way to give your child the money they need now for their home, but it also prevents them (in most cases) from getting any additional money from the sale of your home when you pass away or join an assistive living (or long term care) facility. This can be complicated if you have more than one child, however.
5. If you can’t give your young home buyer the money, you can help them get a loan from the bank with a guarantor mortgage. This means that if your child falls behind on payments, you agree to cover their payments until they can start paying again.
While an increase in home productions could help ease these difficult barriers to entry for new home-buyers, it’s not something we see happening soon since the building of homes has stayed steady at less than 100,000 new residences per year over the past decade. This is hurting entrepreneurs as well, who have been moving their officers away from the city so that they can afford to hire more employees in areas that don’t require higher salary commitments to meet the cost of living.
Until the price to buy for first time home-buyers decreases (as well as the cost of living in the UK), Britons may have to continue to rely on the support of people that have a longer standing credit and earning history – their family.