Protecting your financial future while helping your loved ones
In an era where the aspiration of homeownership seems increasingly out of reach for many, the so-called ‘Bank of Mum and Dad’ has become a familiar concept. Yet, it’s not just parents who are stepping in to bridge the gap; grandparents, often with more disposable assets, are also finding ways to contribute to their grandchildren’s first step onto the property ladder.
This article delves into the various methods through which grandparents can offer a helping hand, highlighting the importance of understanding the financial implications of each option.
Gifting savings and understanding tax implications
With interest rates on savings remaining disappointingly low, grandparents with substantial nest eggs may consider gifting a portion of their savings to aid their grandchildren’s house deposit efforts. However, venturing down this path requires careful navigation of the tax landscape, particularly concerning Inheritance Tax.
In the UK, up to £3,000 can be gifted each tax year without attracting Inheritance Tax, with the possibility of carrying forward any unused exemption to the subsequent year, albeit for one year only. This method provides a straightforward means for grandparents to support their grandchildren financially, yet it demands awareness and planning around tax liabilities.
Downsizing and equity release options
For grandparents inclined towards a more significant gesture, downsizing presents an appealing option. By moving to a smaller and less expensive property, they can free up considerable sums from the equity tied up in their homes. Downsizing unlocks funds for gifting and often results in lower living costs due to reduced maintenance and utility expenses. This strategy enables grandparents to materially assist their grandchildren while simultaneously adjusting their lifestyle to a more manageable scale.
Alternatively, equity release schemes offer a different route for grandparents wishing to stay put in their family homes. These arrangements allow homeowners to access the equity built up in their property without the need to sell, repaying the loan only when the house is sold, usually upon the homeowner’s death or moving into permanent care.
The decision to proceed with equity release requires thorough consideration of its long-term financial impact. Those contemplating this route are strongly advised to seek professional financial counsel to ensure it aligns with their overall financial strategy.
Mortgage support from grandparents
Another avenue through which grandparents can help their grandchildren secure a foothold on the property ladder is by facilitating their mortgage applications. However, it’s imperative for grandparents to be aware of the potential risks involved, particularly when it comes to guarantor mortgages.
Such financial products entail the possibility that should the grandchild fail to meet the mortgage repayments, the grandparents could jeopardise their assets, potentially losing their own homes. An alternative to this is the single-income joint borrower mortgage, which allows individuals on a solitary income to purchase property with the assurance that grandparents or parents will cover any lapses in repayments. This option advantageously removes the family member’s need to secure the loan with their personal assets.
Professional advice is a prerequisite
Prior to making a decision, it’s advisable for those contemplating these financial avenues to engage with a mortgage broker. Such a professional can offer invaluable insights into the benefits and drawbacks associated with each option, tailored to the unique circumstances of the individual. This initial step can also uncover other, perhaps more suitable, financial pathways.
Long-term financial considerations
The inclination for grandparents to assist their grandchildren in acquiring their first home is both understandable and commendable. Nevertheless, it’s crucial that they take into account the long-term implications such assistance may have on their own financial wellbeing. Deploying savings for this purpose could leave retirees in a precarious position should unexpected expenses arise, complicating efforts to replenish these funds.
Additionally, the financial support extended to grandchildren might pose a risk to the grandparents’ financial stability, particularly if they outlive their anticipated lifespan and exhaust their pension resources. Each option carries its unique set of benefits and considerations, particularly concerning tax implications and long-term financial planning. In light of these considerations, obtaining professional advice is highly recommended to guide grandparents towards the most prudent financial strategies for their situation.
Planning to help your loved ones achieve their homeownership dreams?
Should you require additional information or guidance on navigating the complexities of supporting your grandchild’s entry onto the property ladder, our highly experienced team of experts is on hand to provide you with the insights and advice necessary to make informed decisions that protect your financial future while helping your loved ones achieve their homeownership dreams. Contact our team here.
Please note: a mortgage is secured against your home or property. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
