As a society, we often think of ourselves as a nation of homeowners. However, for many young people, getting onto the property ladder has become increasingly challenging. This article explores how grandparents and parents can support their children’s journey to homeownership.
Financial Preparation for Homeownership
Rising property prices and the associated costs of living are significant barriers for young adults today. A recent survey revealed that 73% of respondents believe that obtaining a mortgage without assistance from family is nearly impossible. However, with careful planning and investment, parents and grandparents can provide essential support.
The Importance of Location
The location where your child wishes to buy a home significantly impacts the financial requirements. For example, a 10% deposit on an average home in Derby may cost just under £16,000, while in London, that figure exceeds £47,000. It’s crucial to be flexible in budgeting based on your child’s chosen location.
Understanding Mortgage Terms
While we cited a 10% deposit, it’s important to note that mortgage lenders in the UK typically require a deposit of at least 5%, although first-time buyers often opt for a higher deposit. A larger deposit presents a more favorable borrowing scenario, as it decreases perceived risk for lenders and can result in better mortgage deals with lower monthly payments.
The Unpredictability of Housing Market Prices
House prices are influenced by numerous unpredictable economic factors, including government policies and market supply and demand. Thus, any estimate for future home prices should be treated with caution. Since 1975, average home prices in the UK have more than doubled after adjusting for inflation.
The upward trend in prices has decreased the number of affordable homes available, exacerbating the challenges faced by first-time buyers.
Government Assistance Programs
Fortunately, various government schemes can help aspiring homeowners. For instance, the Help to Buy scheme allows eligible buyers to receive an equity loan covering up to 20% of the price of a new build home (40% in London). Shared ownership options are also available, allowing individuals to buy a share of a property and pay rent on the remainder. However, the sustainability of these schemes is uncertain.
Financial Contributions from Family
According to research from Legal & General, 62% of homeowners under 35 received financial assistance from family or friends when purchasing a property. On average, these contributions amounted to £24,100 in 2019, rising to £31,000 in London. This support, often referred to as the “Bank of Mum and Dad,” played a substantial role in property acquisitions and surpassed the government’s Help-to-Buy initiative.
It’s essential to consider that the first years of a child’s life can be financially demanding. While providing support is commendable, parents should ensure they maintain sufficient savings for their own retirement.
Starting Early with a Lifetime ISA
If your child has reached adulthood, encourage them to open a Lifetime ISA. This account offers a 25% government bonus on contributions, providing a tax-efficient means for saving toward a first home.
For younger children, a Junior ISA could be an excellent investment option, allowing parents to contribute up to £4,368 for the current tax year. The funds belong to the child and become accessible once they turn 18, so it’s helpful to discuss the purpose of this savings in advance to ensure the child understands its intended use.
Conclusion
Investing in a child’s future is a meaningful way to aid their journey toward homeownership. By exploring various financial options such as Junior ISAs and Lifetime ISAs, you can help secure a more stable future for your children.
If you have questions about investment strategies or would like to discuss your options further, Nutmeg’s team is here to assist you.
Important Risk Warning
As with all investments, your capital is at risk. The value of your Nutmeg portfolio may fluctuate, and you may receive less than you invest. Always conduct thorough research and, if needed, seek independent financial advice tailored to your circumstances.