When a leg up becomes a ball and chain

Parents should not jeopardise their own finances when helping children buy a home

Parents who are remortgaging their homes to help their children get on the property ladder are being encouraged be careful not to overstretch themselves financially.

An increasing numbers of parents are releasing the equity in their own homes to give adult children deposits, but advisers are urging them not to feel morally obliged to leave themselves exposed to financial debt when they are older.

"While it may be a good use of unused equity in your home, you should not overstretch yourself by releasing too much. Your home is your primary asset. As people live longer, you may need it to help fund long-term care for you or your partner or both, " according to Mr Tony Brown, adviser at Mortgages Direct, which has just produced a "dos and don'ts" guide for parents who want to help out.

Mr Brown said the firm had recently encountered three cases where couples who had bought a property together with the assistance of their parents had split up within a year.

In two cases, parents stepped in again and bought out the other partner, Mr Brown said, but in at least one case, the parents were out of pocket.

"Because the sale happened so quickly, there wasn't time for a rise in the price of the property to cover the initial costs, never mind the outgoing costs," he said.

As a result, Mortgages Direct is advising parents to be aware that "love may not last forever" and that there may be unrecoverable costs if their child and his or her partner break up.

Other "do's and don'ts" for avoiding "the parent trap" include making sure to get advice on fixed or variable interest rates and ensuring that the repayments are affordable.

"You may want to take early retirement or may be forced into early retirement. Make sure you don't have a millstone around your neck just when you need or want to take things easier," according to Mortgages Direct.

Over the last few years, top-ups and equity release mortgages such as EBS Building Society's Family First loan have increasingly been used as a way for parents to help their children overcome the effects of the property boom, thus spreading the wealth between generations.

While parents have benefited unexpectedly from the unprecedented spiralling of house prices, for their children the prospect of escaping the rental sector dims with every surge.

A recent survey of just over 200 first-time buyers by brokers Irish Mortgage Corporation showed that most still rely on their own savings and financial independence to buy their first home.

However, some 28 per cent of the borrowers surveyed admitted that their parents had either partly or wholly funded the deposit.

Parents who remortgage or take out a mortgage top-up loan to give their children money for a deposit are likely to face higher repayments. (The other option is an extended mortgage term, which lenders may not allow if the parents are nearing retirement age.)

Parents should therefore remember that their house could be at risk if they cannot keep up with the now heftier repayments.

"Financial institutions will bend over backwards to avoid repossessing homes. But if the market weakens, then we could see a more hard-nosed attitude to repossession," Mortgages Direct cautions.

Parents should be careful about acting as a guarantor on their children's mortgage for the same reason, the "do's and don'ts" guide adds.

Mr Brown said some lenders would now accept other family members as guarantors, which might take some pressure off parents who are nearing retirement.

Mr Brown said in one case a borrower's brother had been accepted as a guarantor as his income was sufficiently high and his own borrowings were low enough relative to the value of his property to satisfy the lender that he could cover the repayments in the event the borrower could not.

Despite the words of caution, Mr Brown believes that parents who can afford and do want to help their children buy property should consider getting in early, rather than waiting until their children are getting married or living with a partner.

Many parents bought apartments in university towns and cities to save on rent while their children attended college, he said. This meant they also had an asset to their name that appreciated in value over the years and could then be sold to fund their children's deposits.

"I would advise people who are trading up and have surplus income to buy a second property. That way at least you have got that out there and you don't have to interfere with your own lifestyle when the time comes."