Darren Scott-Guinness: Keeping doctors and dentists informed with the latest economic and investment news.
How would it sound to you if you could help your children or grandchildren to buy a home, whilst also profiting financially? A mutually beneficial investment option could suit you. With savings interest at rock bottom lows, investors are looking at more creative ways to earn better levels of future income. Similarly, first-time-buyers are keen to own their own home at affordable rates. There could be a win-win opportunity here, if structured correctly.
Mutually beneficial financial arrangements
Everyone like a win:win scenario, especially when it comes to finances and family.
Many doctors and dentists choose to help their children and grandchildren out financially, particularly when they are taking their first steps of independence and need a helping hand.
Current market conditions are favourable for borrowers, but not so much for savers.
However, even though borrowers in general are getting a good deal right now, with low rates of mortgage interest, first-time-buyers are still somewhat struggling to first of all raise the deposits necessary to meet the rising house prices, and, even if they can raise the bare minimum deposit, they are then locked out of access to the better rates of interest going forward, leaving them still somewhat struggling.
Lending more for their deposit
According to the Council of Mortgage Lenders (CML), of the 300,000+ first-time-buyer transactions that took place in 2014, half needed help with raising deposit funds from their parents. This figure rose to almost two thirds when looking at London properties.
Usually parents do what they can to help, but with some further financial planning, everyone can end up in a better position, financially, by pulling together resources.
If you have money stashed away in savings, or low volume investments, that are earning next to nothing in income, due to the current low interest rates, perhaps you would consider lending more money to your children or grandchildren for their house deposit, and, charging a reasonable level of interest in return?
The outcome
By pooling resources, the following outcomes could be achieved.
- You, as the “lender”, could end up earning a greater return each month or year than you currently do on your investment in a savings account, or ISA.
- Your child or grandchild, as the “borrower”, could end up saving money on their monthly mortgage repayment from being able to put down a larger deposit.
- Your child or grandchild, could also gain access to much lower rates of interest on a 5 or 10 year fixed rate mortgage, making even further savings on their monthly mortgage commitment, including paying you back for the capital loan, with interest.
Depending on the amount agreed, would depend on just how much of a difference was made.
Dental & Medical Financial Services can run bespoke calculations for your family’s situation, seeking the best mortgage rates for this set up and looking at your own investment portfolio as a whole.
Structuring the loan
The loan and repayment schedule can broadly be set up anyway you choose; formal or informal.
A formal arrangement, where the interest and capital is repaid monthly would need to be disclosed to the mortgage lender, as it counts towards the strict affordability tests for the mortgage application.
However, this is just one option.
If you didn’t need to supplement your income in the near future, then instead of a monthly, quarterly or annual repayment system, the cash could be loaned interest-free, but instead a formal agreement for a capital to be repaid when the house is sold, with or without an interest mark-up.
There are lots of options and it is essential to work with a financial adviser to consolidate ideas for this type of financial planning.
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Dental & Medical Financial Services keep an eye on all investment and economic trends so we can best advise you on your financial matters. Call today and speak to Darren for bespoke financial planning for you and your family.
Tel: 01403 780 770