Getting kids on to the property ladder is not a worry for me yet but I can see it’s an issue for quite a few other parents.
Like many other things, it was a lot easier back in the day. I bought my first one-bedroom apartment in Oval for a whopping £56,000 at the age of 26. Ah, if only I’d kept it. Nowadays a similar place would cost in the region of £400,000.
All well and good, but who could afford to buy something like that now? Hardly anyone, even the moderately minted. Which is why, if you’re in the market to help your child(ren) with their first home, you really should take a look at the government’s help to buy scheme.
I was researching this topic for another article and was struck by what a good deal it appears to be. There’s actually two parts to it: the shared ownership option and the equity loan. It’s the latter that I think parents would be interested in.
Essentially the government loans you up to 20% of the property value (40% in London) so you can then get a 75% mortgage with just a 5% deposit. The loan needs paying back after 25 years or when you sell the property. It’s interest-free for the first five years, after which you pay 'fees' on it, comparable to mortgage rates but without repaying capital.
There are terms and conditions, of course. The property must be a newbuild and cost up to £600,000. You can’t sublet it or own any other property at the time of purchase. Meanwhile, those fees rise in line with inflation, not general interest rates, so they could work out as relatively expensive. With an unconventional ownership structure, remortgaging might be problematic and it’s not exactly free money. The loan will need repaying eventually and could grow as time goes by. This is because you will still repay, for example, 20% of the property's value when it is sold, not 20% of the purchase price. If property prices have risen, your loan will be bigger. But then the opposite is true. So if property prices fall, so does the value of the loan and you aren't left with a loan larger than your stake in the house (so-called negative equity).
On the plus side, it does allow a property to be purchased without waiting for years to save a massive deposit or needing a possibly unaffordable cash injection from parents. Best of all, as the property is in the child’s name, parents can avoid the stamp duty, capital gains and perhaps income tax which could be due on buying a second property themselves for their child to live in. With Help to Buy only running until 2021, it has to be a consideration now.
UPDATE 30 AUGUST 2018: There have been reports in the press about Help to Buy new-build properties being allegedly overpriced by developers so compare your target home carefully.
See our SMM guide to mortgages for first-time buyers here.