Moneyfarm has partnered with Which? Mortgage Advisers to create a must-have guide for parents wanting to help their children on the property ladder, kicking off its ‘Once in a Lifetime’ investment series.
With house prices at record levels, it’s important your children know all the costs involved with buying a home to make sure they can actually afford it.
As most people need a mortgage to buy a house, your children should first find out how much they can borrow. To give you a rough idea, if they don’t have any large debts, your kids should be able to borrow around four to five times their salary. This amount is four to five times joint salaries, if they’re buying with a partner or friend. Mortgage lenders will also make sure they can keep up with their repayments, both now and in the future.
Once you and your children have worked out how much they can borrow, you’ll be able to start looking at homes they might want to buy with them. Exciting. But before you get too deep into online property searches, make sure they know all the costs to look out for.
Deposit
The amount of upfront cash needed in order to buy a home can change depending on things like credit score, salary and the type of property. It might be possible to buy with no upfront cash but the more money your children can put down, the less they’ll pay for their mortgage.
Launched in 2013, the Government’s Help to Buy scheme can make it easier for those in the market for a newly built home. The scheme allows first-time buyers to purchase a new home with a 5% deposit, which on average is around £12,500, the equivalent of saving £520 a month for two years.
Since the launch of Help to Buy, we’ve seen more people buy with a 5% deposit in general as mortgages have become easier to get. This is great news for home buyers and can make owning a home a realistic option.
If you want to help your children onto the property ladder but don’t want to gift cash, a family offset mortgage allows you to put your hard earned savings into an account linked to your child’s mortgage.
No one can access the money, but it works like a deposit on the property, making things cheaper for your children. The value of the savings is taken away from the amount your child borrows from the mortgage lender, until a time when the owner of the property, can take a mortgage to pay you back.
Stamp Duty
This is the amount of money paid in tax to buy a home and has the potential to make things unaffordable. However, there’s good news. Your child won’t pay any stamp duty on the first £300,000 of their first home.
Here are the current stamp duty rates:
- 0% stamp duty for a property valued between £0 – £125,000
- 2% stamp duty on the next £125,000 (the portion from £125,001 to £250,000)
- 5% stamp duty on the next £675,000 (the portion from £250,001 to £925,000)
- 10% stamp duty on the next £575,000 (the portion from £925,001 to £1.5 million)
- 12% stamp duty on the remaining amount (the portion above £1.5 million)
To give you an example, if your child buys their first home for £300,000 in England or Wales they’ll pay no stamp duty. If you’re not a first time buyer in England and Wales, you’ll pay £5,000 in stamp duty.
Legal fees
When you have found the home your child wants to buy, they’ll need a solicitor (sometimes called a Conveyancer) to sort out the legal side of things. A conveyancer will work on things like:
- Dealing with the Land Registry
- Stamp duty charges and payments
- Collecting and transferring money during a house sale
- Providing legal advice and recommendations
- Drawing up and assessing contracts
Conveyancing fees range from around £500 to £1,500, depending on the cost of the property and whether the person is just buying, or selling one home and buying another.
If you or your child is buying and selling a property, it would be sensible to put aside an extra £2,000 or so to make sure there are no nasty surprises along the way. It’s worth shopping around and getting a quote up front to allow your kids to budget.
Other costs
We’ve already covered the main costs your child will need to consider when buying their first home but it doesn’t stop there. Other things they may need money for are:
- Removals – This can range from a few hundred to several thousand pounds depending on how much they own and how far they are moving.
- Surveys – A property survey is a must and can sometimes help negotiate a lower price. Set aside £500-£1000 for a survey.
- Insurance – Some mortgage providers require you to have building and contents insurance. It’s wise to look at life insurance to cover to cost of the mortgage if you die, and you might want to add on critical illness cover. Your mortgage lender will require you to have buildings insurance that covers your new home. It’s a good idea to get home contents insurance as well to protect your belongings. Separate buildings insurance and home contents insurance on average costs around £200 and £100 respectively.
- Household bills – On moving into the new home your children will need to set up council tax, water, energy, internet, and possibly TV packages. Additionally, if they own a car they may need to look into whether or not they need to pay to council for a parking permit. As a result, they might need a few hundred pounds set aside for that first month in the new property.
Investment advice can help your children on the property ladder
Buying a house isn’t cheap. It takes years of diligent saving for people to have enough for a deposit.
If you’re planning on giving your children a helping hand, you’re not alone. One in four home buyers are relying on help from their friends and family to get a deposit, although the amount parents are parting with is falling as parents start to feel the pinch, financial services firm L&G says.
There are a number of ways you can help your children onto the property ladder. One popular way is to gift or loan your children a chunk of money to help increase the deposit and lower the mortgage.
Even if it’s on the decline, parents are still handing over £18,000 on average to help their children buy a property. Here, we’ve given you some five tips to ensure that you aren’t left out of pocket trying to help your children.
Start early
When it comes to investing, the earlier you can start the better – even if that is as soon as your child’s been born. The sooner you begin, the less of a financial burden this will be on your paycheque later down the line, and if plans change, you can always use this money for something else.
You’ll also be able to take more risk with your money because you have a longer time horizon. The short-term fluctuations won’t matter so much when you’ve got over a decade until you’ll need your money.
As you get closer to when you think your child might want to purchase a home, you can reduce the risk in your portfolio to protect the value of your money instead. You might eventually transfer this money to cash when you’ve got less than a year to go.
Get cost-efficient investment advice
When you’re investing for you and your family’s future, the financial markets can be a daunting place. You’re expected to know what you’re doing, but you’ve either been burnt before, don’t have enough time between juggling your career with navigating homework schedules, or you just don’t have the financial confidence in your ability to make the right decisions to protect your family’s financial security.
Investment advice helps people make better decisions with their money, allowing them to lead more financially secure lives. The problem is, many people don’t realise they can access quality investment advice at the touch of a button and fraction of the cost of the traditional space thanks to innovation in the wealth management space.
By understanding what you’re investing for, when you’ll need your money and your financial background, digital wealth managers like Moneyfarm can match investors with investment portfolios that reflect them and their financial goals.
Innovation in this area means that advice will soon become even more personalised, incorporating more data points to cater investments to households not just individuals.
Invest regularly
When successful investing is centred around buying something for cheaper than you sell it, it might seem that trying to time the markets is the best way to maximise your returns. Unfortunately, it’s not so simple and even the investment professionals struggle to get it right every time.
Instead, adopting a little and often approach can actually help your money go further. By averaging out the amount you pay for an investment over time, you can lower the price of the asset during times of volatility. The less you pay for an asset, the quicker you breakeven and make a profit in a growing market.
This strategy is called pound cost averaging. It also allows investors to ignore market noise and stick to their strategy when they might be tempted to diverge from their original plans. Short-term fluctuations rarely matter over the long-term, although it can seem like a big deal at the time.
Be aware of what you’re paying in fees
Most people are happy to pay a fee for a service, and investing is no different. The problem is when investors are charged unnecessarily high fees for a service they might not receive. You’d demand a refund in the high street or in a hotel, but this is just accepted as a fact of life for investors.
Technology and innovation in financial services is now providing investors with a cost-effective way to make their money work harder for them. The less you pay in charges, the more of your money you get to keep invested in the market. Which leads into our final point, compound interest.
Compounding – the eighth wonder of the world
Compound interest is when the returns you make on your investment are reinvested and earn their own return. It sounds simple enough, but it’s one of the most powerful forces of investing – Albert Einstein even named it the eighth wonder of the world.
The more of your money you get to keep invested, whether that’s through competitive fees or because you’re putting more money away, the more you can maximise your returns. Over the long run this can make a real difference to your returns.
