In the Mail on Sunday You magazine last weekend, there was as article about a lady who felt that she had to sell her family home in South London to provide her 23 and 25 year old kids with sufficient deposits to buy their own homes. Whilst I would agree that many people can only get on the ladder with the help from the bank of Mum and Dad, I could not help feeling that there was some sensationalism around this story.
Whilst I sympathise with the lady about having to leave the home which they renovated with love and care to turn into a beautiful family home, there comes a time in life when most couples decide to downsize to a more manageable and affordable property. This is because as people get older it becomes harder to look after the large family home, which they may be rattling around in since the kids have“flown the nest”. It can also be expensive to maintain and heat a large home. It is part of most people’s natural life cycles.
The article suggested that the only way the two twenty something kids would get on the housing ladder was for the parents to sell their family home and give the kids the deposits they needed. Whilst there are some tax advantages to this in terms of reducing potential inheritance tax liability by giving away as much of your estate as you can at least 7 years before you die – there were a few assumptions going on in the article which I would like to question.
Just because the lady was able to purchase her first flat at aged 23 does that mean her kids have to do the same? Do the kids really need to have their own places? Most people leave the comforts of home and decide to rent with friends for a few years until they settle down with a partner or decide it is time they live on their own. This helps kids to mature and become more independent.
In the article it mentions that the first property the lady purchased in 1982, for £36,000, would now cost something like £632,500 and how unaffordable this would be for here kids now. Her story would be very different if, instead of selling that first property when she moved in with her partner, she had retained it and rented it out. She would now be in a position where she could sell her rental property and, after paying Capital Gains Tax (CGT), she could give the proceeds to her kids as their deposits. What an incredible thing to be able to do.
Hindsight is a wonderful thing and I guess many people wished they had held on to properties that they have sold in the past. However, we can use this learning to provide an alternative strategy for this lady and her kids. If she and/or her partner are still working then rather than selling their beloved family home they could instead remortgage it to raise some equity, which they could then give to their children as a deposit.
Rather than the kids going off and buying their own flats, why not buy a larger house together in which they can live along with a few lodgers. Now, they may have to buy this in a cheaper area than where their parents live, but this is far more affordable than living on their own. As first time buyers they could get a 90% or 85% Loan to Value mortgage, which on a £500k property in London would be a deposit of only £50k to £62k. That is not a huge amount to release from their parents home. The parents may need to be guarantor on the mortgage as lenders will only consider a multiplier of up to 4.5 x combined salary for a residential mortgage right now.
This means the parents don’t have to sell their dream home just yet and the kids get their foot on the property ladder as well as the independence both they and their parents crave.