Mortgage Clinic: How big a deposit does a first-timer need?
Wednesday 23 April 2008
'I inherited £70,000 after the sale of my late father's house, and I want to give some of it to my son as a deposit for a flat. But he's worried that his £24,000 income and financial problems as a student will harm his credit record and limit access to cheap mortgage deals. Should he stay at home with us and save even more, or leap into choppy financial waters?' HS, Surrey
Nearly every first-time buyer faces an almighty uphill struggle to get on the housing ladder today.
The credit crunch and property-price slowdown – and price falls in some areas – has cast a severe pall over the UK's housing market, prompting lenders to look even less favourably on first-timers with low incomes and no, or next to no, deposit.
A £70,000 gift to your son would boost his fortunes, says Katie Tucker at broker John Charcol. Don't look for costly 95 per cent loan-to-value (LTV) mortgages, though, since a deposit that size will open doors because of greater affordability.
"If the £70,000 makes up a deposit of at least 25 per cent, your son will be able to take on a more affordable mortgage at rates 0.4 per cent lower [than those for most first-timers]," says Tucker. He would qualify for table-topping rates of as little as 4.99 per cent for a two-year fixed with HSBC or 5.19 per cent with Cheshire Building Society, according to the Moneyfacts website.
Unless your son owes thousands of pounds on defaulted credit-card or personal-loan repayments, a previous patchy credit record as a student shouldn't be a problem if he's now earning a decent wage.
But while your money will help him on to the ladder, it won't do anything to calm his fears of a shaky market.
"Looking at it from a purely financial point of view, there'll likely be flat prices or a fall this year, which means that, technically, he could lose money in the housing market," warns Rob Clifford at broker Mortgageforce. "But this is not about turning a fast profit and moving on; it's about finding a place for your son to live."
He may even be able to take out a repayment mortgage (paying back both interest and capital) instead of an interest-only like so many first-timer buyers.
The size of the gift means, though, that it would be included in your estate (and could attract inheritance tax at 40 per cent, if you were to die within seven years of giving it to him).
But that might not be a problem. "If you've come into the money yourself within the last two years, you can rewrite the will via a deed of variation, which would mean your son directly inherits the £70,000, leaving no potential tax to pay," points out John Whiting, tax specialist at PricewaterhouseCoopers.
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