Remortgage to Help Your Child Buy a Home
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Joe Nicholls
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Remortgage to Help Your Child Buy a Home
At Asset Harbour, we understand that many parents want to give their children a helping hand onto the property ladder. In this article, Joe Nicholls explores the common questions surrounding remortgaging your own home to provide a deposit for your child.
You will learn how the process works, the impact on your personal finances, and the legal requirements involved in gifting funds for a first property purchase.
Can you remortgage your home to help your child buy their first property?
Yes, you can remortgage your home to release some of the equity you have built up. This gives you access to a lump sum of cash, which you can choose to gift or lend to your child to help them put down a deposit on their first home.
How does releasing equity from your home to gift a deposit actually work?
Releasing equity to gift a deposit means you are borrowing more money against the value of your home. Your current property acts as security for this new debt.
Essentially, you are converting the value locked in your property into a spendable cash sum to give to your child.
What’s the difference between gifting a deposit and acting as a guarantor on your child’s mortgage?
The main difference is how you provide support. Gifting a deposit involves handing over cash upfront, which reduces the total amount your child needs to borrow.
Acting as a guarantor means you promise to use your income or property as backup if your child cannot make their payments. This can increase the amount a lender is willing to let them borrow.
How much equity can you typically release, and does your age affect the amount?
You can usually release up to 75% or 80% of your home’s value through a standard remortgage. Your age plays a big part in which products you can use.
Lenders require the mortgage to be repaid by the borrower’s 70th or 75th birthday. Applying at an older age usually means a shorter mortgage term, resulting in higher monthly repayments and potentially making it more difficult to satisfy affordability assessments.
Do you need to provide a gifted deposit letter, and what does the lender expect it to include?
Lenders expect a signed gifted deposit letter to prove the money is a genuine gift with no strings attached. This document confirms that you have no legal claim or financial interest in the new property. It also proves to the lender that your child does not have an extra monthly debt to pay back to you.
The letter must include your full name and address, the exact amount being given, the recipient’s name, and a statement that no repayment is expected.
Will remortgaging to help your child affect your own monthly payments and retirement plans?
Remortgaging will increase your total household debt and affect your monthly outgoings. If you choose a standard capital and interest mortgage, your monthly bills will go up because the loan is larger.
If you are close to retirement, the lender may shorten the mortgage term. This means you have to pay the debt back faster, which can lead to much higher mandatory monthly payments.
Are there any tax implications when gifting a deposit from the equity in your home?
While you do not pay tax immediately to release equity and your child pays no income tax on the gift, there are long-term things to consider. The gift could create potential future liabilities for inheritance tax and may occasionally involve capital gains tax risks. It is a good idea to seek professional tax advice before gifting any funds.
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How do lenders assess whether you can afford to remortgage if you’re releasing a large sum?
Lenders use strict stress tests to make sure you can manage a larger loan. They will usually cap your total borrowing at between 4.5 and 6 times your annual income. In addition, they will also check whether you could still afford your mortgage repayments if interest rates were to rise to 7% or 8%.
Your last three months of bank statements will be taken into account to review your spending on things like childcare, insurance, and lifestyle. Any existing debts, such as car finance or credit cards, will also reduce the amount you are allowed to borrow.
Underwriters audit your financial habits thoroughly to ensure that the increased debt is sustainable for your specific circumstances.
Can you still remortgage to help your child if you have an outstanding mortgage balance?
Yes, even if you still have a balance on your current mortgage. This is often called capital raising. You can either wait until your current fixed rate ends and remortgage for a higher amount, or you could ask your current lender for a ‘further advance’ to be added to your existing mortgage.
What happens if your child’s property purchase falls through after you’ve already remortgaged?
If the purchase falls through, you will still have the extra cash, but you are also responsible for the higher mortgage payments. You will need to keep the funds safe until your child finds another property to buy or decide what to do with the additional borrowing.
Summary:
Helping your child buy their first home by remortgaging is a generous way to support their future, but it requires careful planning. By releasing equity, you can provide a significant deposit that helps reduce the cost of buying a home.
However, it is vital to understand that this increases your own debt and could lead to higher monthly repayments, especially as you approach retirement. Taking professional advice and ensuring all legal documents, like a gifted deposit letter, are in place will help the process run smoothly.
Key Points:
- Remortgaging allows you to release cash from your home’s value to gift to your child.
- Lenders allow you to borrow up to 75% or 80% of your property’s value.
- A gifted deposit letter is a legal requirement to prove the money does not need to be repaid.
- Your age can affect the length of the mortgage and the cost of your monthly payments.
- Lenders will perform strict affordability checks and stress tests before agreeing to the loan.
- There may be long-term tax implications, such as inheritance tax, to consider.
YOUR HOME/PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP TO DATE WITH YOUR MORTGAGE REPAYMENTS.
There may be a fee for mortgage advice. The precise amount of the fee will depend upon your circumstances but will range from £99 to £549, and this will be discussed and agreed with you at the earliest opportunity.
For specialist tax advice, please refer to an accountant or tax specialist.
Asset Harbour Mortgages & Protection, trading as Asset Harbour Mortgages & Protection Ltd, is an appointed representative of HLPartnership Limited which is authorised and regulated by the Financial Conduct Authority.