From an economic perspective, having a strong housing market is something for a country to be proud of.
However, with the average wage now £30,368 (£586 a week according to the Office for National Statistics), how does the market continue to grow when the average house price is now nearly nine times the average income? This increases to 17 times if you are trying to buy in London.
Current conditions are attractive for first-time buyers seeking a mortgage, with interest rates so low. It is possible to buy a property with just a 10 per cent deposit, but you should find interest rates improve if you are able to provide a bigger deposit.
The pandemic may have encouraged individuals to save more, which is normal in recessionary times, but how long would you have to save to have enough for a deposit?
To put the property market into context, we can calculate how long it would take to save for a deposit to buy an average-priced house by using the savings ratio – a measure of the disposable income that UK working individuals have available to save.
At present the savings ratio is 11.7, but the long-term average is 8.4. So as an example, based on today’s average house price of £270,000, you would require £40,500, plus around £5,000 for associated costs.
At a time where their children are finding it hard to raise the deposit for property, the bank of mum and dad is again stepping in. According to Legal and General, the bank of mum and dad is now the ninth-biggest lender in the UK.
Parents have a range of options for helping their children onto the property ladder, including:
- making an outright gift from their own savings;
- using their own home;
- supporting a mortgage application; or
- charging other assets.
Each of these requires some thought as the right choice is, as ever, down to individual circumstances.
Making an outright gift from their own savings
For wealthy individuals with surplus savings that they are confident they will not need for themselves in later life, gifting is the simplest way of transferring money to their children.
It can also have the added benefit of reducing a parent’s inheritance tax liability.
An outright gift is potentially exempt for IHT purposes after a period of seven years. The benefit starts to kick in after three years but if the individual survives seven years, it will be considered as being outside their estate.
Not many parents can afford to offer the full value of the property, so the conversation generally starts with how much the child can afford on the mortgage and how much the parents can help, by making up the difference by way of deposit and costs.
It may be preferable for parents to lend the deposit but in this case, the lender may make a reduction on the amount that they will lend in the form of a mortgage.
For IHT, we would look to help parents to do their sums to clarify how much is affordable for them. If the money is loaned, the child may not be in a position to return the money quickly if the parent needs it back.