Whether you are a new parent or already have grown up children, you will have given a lot of thought to finances and your children’s future. Since a huge proportion of the population are currently in some form of debt, you may want to try to safeguard your kids from entering debt themselves. From student debts to mortgages, there is a lot to consider. Here are our tips on how to help your kids avoid debt in their adult lives.
Clearing student debt
Research from Private Finance, a mortgage broker, suggests that parents of graduates could save their children more than £30,000 in interest by remortgaging to pay off their student debt (an average of £50,000 per graduate). With the interest rate on student loans at 6.1 per cent, top-earning graduates will repay an average of £93,000 on that debt, according to the Institute of Fiscal Studies.
The cost of a £50,000 mortgage on a 30-year term — the maximum repayment period for student loans — at today’s average two-year fixed rate of 1.42 per cent would be £61,440.
“Borrowing rates are likely to remain well below the rate of student loan interest for years to come,” according to Shaun Church, a director at Private Finance, the mortgage broker. “However, anyone thinking of remortgaging to pay off their child’s loan would need to make sure their finances are in good health first.”
For many graduates, the gift of a house deposit could be more beneficial, he says. Sarah Coles, a personal finance analyst at Hargreaves Lansdown, the investment manager, says there are no guarantees about what will happen to mortgage rates or the student loan system.
You can give as much money as you like to your children without immediate tax implications
“When weighing up one kind of debt over another, it’s not just a question of what the interest rate is, but who bears the responsibility for repaying the debt. If parents choose to take this on, and remortgage to do so, they need to consider that a remortgage may mean they are paying their mortgage for longer, and are unable to free up the cash to save for their retirement.”
Steve Webb, the director of policy at Royal London, the insurer, says: “There is no one-size-fits-all answer. Paying off student debt early may be a poor investment because most graduates will end up having some of their loan written off.
“Counterintuitively, paying off part of the outstanding debt will not reduce your children’s outgoings now because of the way in which repayments are calculated.”
Helping with a deposit
Some parents may prefer to give a child a deposit for their first home. “Assuming this is practical, it could be a sensible option,” says Ms Coles. “A high-earning graduate arguably doesn’t lack the income to repay debts and a mortgage — they lack the capital to use as a deposit — so helping with this closes a more vital gap.
“It will also enable them to buy earlier, which will save them money in rent and potentially enable them to buy more cheaply ahead of further property price rises.”
You can give as much money as you like to your children without immediate tax implications, but if you die within seven years of the gift being made it would become subject to inheritance tax.
Alternatively, a number of lenders offer family-backed mortgages. The Barclays Family Springboard mortgage, for instance, will lend up to 100 per cent of the value of a property as long as a family member provides a 10 per cent security deposit, held in a savings account with the bank. Barclays also has a Family Affordability Plan, which uses parents’ income alongside the child’s income to calculate how much they can afford to borrow.
You might decide to open a children’s pension, in which you can save up to £2,880 per year. The money would get the same tax relief as any other pension, meaning the taxman will add 20 per cent to payments (up to £3,600 each tax year). Your child wouldn’t be able to access the money until later in life, however.
Of course, not all families will have the ability to side aside money to prevent debt occurring. Many families struggle to meet the financial demands of present day life, and cannot think too much of future planning in regards to their children. However, where possible, it is encouraged to start saving money for your kids to help them avoid debt as adults.