2 important questions to ask to yourself before helping your kids onto the property ladder

16 May 2024

If your children or grandchildren are looking to secure a foothold on the property ladder in the near future, you may be looking to offer them financial help.

After all, the 2020s have proved tough for first-time buyers who are facing higher-for-longer interest rates, along with a surge of around 75% in the average price of a home since 2005, the Office for National Statistics (ONS) reports.

Due to these factors, among others, USwitch figures say that in the 2022/23 tax year, the average age of a first-time buyer was 34, after ranging between 32 and 33 for the previous decade.

According to Zoopla, in 2023, first-time buyers put down between £26,400 and £144,500 as a deposit, on average, for a three-bedroom home. In the north-west, the average deposit was £36,000.

Yet sadly, it may be difficult for your children to save this money on their own, even if they work full-time. In March 2023, the BBC reported that wage stagnation since 2008 has left workers with an £11,000 annual shortfall.

As such, your children may now need more help than ever when stepping onto the first rung of the property ladder.

Here are two questions to ask yourself before you offer your children money for their first home.

1. Am I offering enough for my child to buy the home they want?

When planning to give your child money for their first home, you might have selected an amount that you felt was appropriate and affordable for you.

While this makes sense from your perspective, it may help to check in with the recipient about the help they are expecting, or indeed, how much they might actually need. This is especially important in light of higher-for-longer interest rates, which have pushed mortgage rates above 4% in most cases.

Higher-for-longer interest rates may mean that in order to afford monthly repayments on the home they want, your child could need to place a larger deposit on that property than they initially thought.

For example, according to the MoneyHelper mortgage calculator, a £200,000 property bought using a £50,000 deposit, with an interest rate of 2.5% on a 25-year repayment mortgage, would incur a monthly repayment of £672.93. This is likely to be affordable for most working adults in their 20s or 30s.

A 2.5% interest rate might have been realistic in 2019 or 2020, when rates were much lower – but in today’s world, the Bank of England (BoE) base rate has stood at 5.25% since August 2023, which has prompted mortgage lenders to keep their rates higher too.

So, assuming a 5.25% interest rate as of May 2024, your child would now have to put down a deposit of £88,000 on the same property in order to match the more affordable repayments of around £672.

With their original deposit of £50,000, your child’s repayments would stand at around £898 a month.

Talking to your child about the kind of home they want to buy, and the lump sum they might need to put against it, could be a helpful step to take before offering financial assistance. That way, everyone’s expectations can be adjusted accordingly, and you can move forward as a team.

2. Will offering this money affect my long-term financial stability?

If your child is struggling to save up for their first home despite working hard, you might jump in and help out without a second thought.

While this is admirable, it is very important to consider whether offering them a lump sum or ongoing support with repayments could affect your own financial viability.

You could be considering one or several of the following actions to provide your child with the funds they need:

• Drawing a lump sum from your pension
• Liquidating investments
• Selling other valuable assets such as a rental property
• Taking money from your own inheritance
• Using a portion of your income to support their monthly repayments.

Any of these forms of assistance could fit perfectly into your financial plan – but without guidance, it may be difficult to anticipate the potential ramifications of helping your child buy a home.

Remember to think about:

• Whether you have plenty saved up for a rainy day, including an emergency fund
• Your annual budget for retirement, and if this could be affected by helping your child
• How inflation could affect your spending power over the coming decades
• If you have enough saved up to pay a potential later-life care bill.

Taking the time to review your finances carefully before offering help to your children may ensure this support is not given at the cost of your own financial stability.

Working with a financial planner as a family could put your mind at ease

Before helping your children onto the property ladder now or in the future, it could be worth sitting down together and talking with a financial planner.

We can assess your family’s finances and help you to determine the affordability of your plans, as well as any tax implications these could have too.

To speak to a financial planner, email info@depledgeswm.com or call 0161 8080200.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate tax advice.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.