Why first-time buyers are getting older

A new report by the Mojo Mortgages has uncovered quite how much harder it is for first-time buyers today compared with 50 years ago.

The online mortgage broker claims that first-time buyers in 2020 need to borrow 18 times more than those in the 1970s, and that the cost of a first home has increased from four times the average salary to eight times.

These affordability issues have resulted in the average first-time buyer age rising from 25 to 33 in the past 50 years.

First-time buyers relying on ‘bank of Mum and Dad’

In such a difficult market, cash-strapped buyers are increasingly relying on help from their parents and grandparents.

And one of the most common ways parents help their children is by gifting them some or all of the money for a house deposit.

Research by Habito found that 40% of first-time buyers are now gifted cash by a family member, with this figure rising to 60% in London.

_{Source: Habito, February 2020.}

Should you gift your child a deposit?

Gifting a deposit might seem like a straightforward way of helping your child, but you will need to think about any tax implications.

That’s because cash gifts of more than £3,000 in any one year could be subject to inheritance tax (IHT) if you die within seven years of making the gift.

Even if that’s unlikely to be a concern for you, holding off gifting a deposit could prove be a costly decision.

A cross-party group of MPs has proposed an overhaul the IHT system, including introducing a flat 10% tax rate on gifts of more than £30,000.

If you do decide to give your child money for a deposit, you’ll need to provide a letter confirming you provided the cash and that it won’t need to be paid back.

Some lenders may also require you to sign a declaration that you will have no legal interest in your child’s property.

Key points:

Gifting your child a deposit will allow them to take out a mortgage on the open market.

With 90% and 95% mortgages dropping in cost this can be a simpler and more cost-effective option than tying yourself into a guarantor or joint mortgage – if you have the money to spare.

Guarantor mortgages

An alternative to gifting cash is to use your property or savings to help your child get on to the ladder with a guarantor mortgage.

Guarantor mortgages are sometimes described as 100% mortgages, as many don’t require the borrower to put down a deposit.

Instead, the parent will either lock up cash in a savings account with the lender or agree to have their property used as collateral if the child defaults.

Option 1: Using your savings as security

These deals generally require either 5% or 10% of the cost of the new property to be placed into a savings account with the lender for a set number of years (three and five years are the most common periods).

How much interest is paid on savings varies from deal to deal, and some products don’t pay any interest at all.

Key points: 

These deals allow you to keep hold of your savings rather than giving them away, but you’ll be locking your cash up for a number of years, and not necessarily with a good interest rate.

Your child will also have far fewer mortgage options than on the open market.

Option 2: Using your property as security

These deals involve a lender securing a charge against the your home in case your child defaults on their mortgage.

The rules vary by lender. Some will set a 10% charge against the home, while others will set a charge of as much as 25%.

The charge is then released after a set number of years or once your child has paid back a big enough proportion of the mortgage.

You’ll usually need to have a certain amount of equity in your property, but again this varies by lender.

Key points:

Using your property as security can avoid the need to part with any cash, but it puts your home at risk if your child defaults on their mortgage.

Again, these deals aren’t particularly common, so there’ll be less opportunity to shop around compared with the open market.

Joint mortgages

Joint mortgages allow you to buy a property with your child.

This could significantly boost your child’s chances of getting a mortgage as your income will be taken into account, but can be an expensive and risky.

The biggest concerns are that your name will be on the deeds of your child’s home, so you’ll need to pay the stamp duty surcharge if you already own a property, and you’ll also be jointly liable for the mortgage repayments.

Key points:

Joint mortgages are a good way of boosting your child’s borrowing power, but stamp duty implications make this a less-attractive option.

JBSP mortgages

Joint borrower sole proprietor (JBSP) mortgages offer an innovative way of buying a property with your child but without needing to paying the stamp duty surcharge

JBSP deals take into account the financial circumstances of both you and your child when assessing affordability, but only your child will be named on the property deeds.

This mean you won’t officially own any share of the property. You will, however, be named on the mortgage and will be considered jointly responsible for repayments.

Key points: 

JBSP mortgages are a good idea in theory, but they’re not widely available.

Lenders are more likely to offer these deals to first-time buyers in industries where their salary is likely to increase significantly.

Banks will also take into account your age at the end of the mortgage term, so older parents may be ruled out.

Tips for parents helping first-time buyers

If you’re considering one of the mortgage options above, consider taking advice from a whole-of-market mortgage broker, who can assess your financial circumstances and explain which deals might be most suitable.

You can find more advice in our guide on how to help your child buy a home, which includes 10 key things to think about before handing over money or signing up for a guarantor mortgage.

Which? Money Podcast: buying your first home

In December, the Which? Money Podcast went back through the decades to investigate whether it was once easier to buy your first home, and assessed the difficulties facing first-time buyers in 2020.

You can listen to the full episode below, or find it on Spotify, Google Podcasts, and Apple Podcasts.