The days of 100% mortgages are unlikely to return any time soon. Quite the opposite, in the current climate, it’s a case of “the bigger the better”, where deposits are concerned. While it may be the purchaser who hands over the deposit, many first-time buyers are turning to the bank of mum and dad for help to get on the housing ladder. This, however, impacts on the financial health of the parents in question. With this in mind, here are three points to consider on the topic.
Set expectations early
Ideally parents should start teaching their children about the importance of managing money as soon as the latter are old enough to grasp the basic concepts of it. As they grow, involving them in the management of the family finances, as far as reasonably possible, will both help them to learn the skills they’ll need themselves in later life and help them to gain an appreciation of what is within their parents’ means - and what isn’t. Clear communication should go a long way to stop children making plans based on unrealistic expectations of what their parents can do for them.
Start saving early
The pre-school years can be very expensive, but once children reach school age, costs can often become more manageable, which gives parents about 11 to 13 years to prepare for when their child leaves school. This money may well be needed to help them through university or to help with the practicalities of entering the world of work, for example if they need a car to reach their place of employment, but having it ready can go a long way to avoid overloading the family finances at what can be a very expensive time and can therefore make it easier for parents to start saving again for their children’s next major milestones in life, such as marriage, getting on the housing ladder and having children, which are often closely connected. While it might sound great, in theory, to give a financial gift to your children as a surprise, in reality, it is likely to be better practice to make them aware of what you are doing and why and, crucially, what they can expect in what timescales. Basically this relates to the previous point about setting realistic expectations.
Take tax into consideration every step of the way
When your children are born, it’s worth taking some time to think about the advantages and disadvantages of opening a Junior ISA for them. The obvious advantage is its tax-efficiency. The potential disadvantages is that once the money has been deposited, it’s locked away until the child turns 18 and once they do turn 18, the money is theirs completely to use as they wish, whereas you might prefer to have some degree of control over how it is spent. As soon as your child turns 16, they become eligible to open a cash ISA in their own name, which they can hold at the same time as their Junior ISA, giving a two-year period in which meaningful tax gains can be made. Once they are adults, if the family is still working largely as a single unit, from a financial perspective, then it may be worth parents and other older relatives considering giving the younger adults gifts to put into an ISA wrapper, on the understanding that, unless otherwise agreed, the money is to be kept for major events and purchases (such as weddings and buying a home). This has the advantage of providing tax-efficient savings, which may go some way to compensating for the fact that interest rates are currently very low.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.