Help for first-time buyers
Last year the vast majority of first- time buyers – 80 per cent – needed a helping hand onto the bottom rung of the property ladder from their parents.
With house price growth having outstripped wage inflation in many parts of the country for many years, it can be extremely difficult to buy your first home. Even if you earn a decent income, lenders often require a significant deposit to take out a homeloan, and the cheapest rates are reserved for those who can stump up most upfront.
The answer for many aspiring homeowners has been to turn to the Bank of Mum and Dad for a lump sum of money to bulk up their deposit. This means you can borrow less and are more likely to get accepted onto one of the cheaper mortgage deals. It’s a simple process, providing your parents have a large sum of surplus money sitting in an account. But for many borrowers that simply isn’t the case. So what do you do if your parents are willing to help you onto the ladder, but don’t have a pile of ready cash to hand over? Can they help in other ways?
The mortgage industry has responded to this need by designing mortgages that allow family members to help you get a mortgage, without handing over a large cash sum. David Hollingworth, associate director of advisers at L&C Mortgages, says: “Parents have become part and parcel of most first-time buyers’ hopes of getting on the ladder. In most cases that is still likely to be a cash gift towards the deposit but these alternative products can be useful.”
So, what’s on offer?
Give a guarantee
A guarantor-style mortgage is where a family member, usually a parent, agrees to guarantee a portion of your homeloan, so that if you cannot meet your repayments they assume liability for your debt. If all goes well, they don’t need to pay a penny; they just effectively put their name to your debt. But if you do fall seriously behind on your repayments they can be asked by the lender to make up the shortfall.
The parent can usually act as guarantor if they can show they have sufficient income to cover the debt (in addition to their own mortgage if they have one) or if they have equity in a property that they are willing to use as security against their child’s mortgage. Each lender has slightly different criteria so it is worth shopping around to see what’s available.
For example, the Aldermore Family Guarantee Mortgage enables the guarantors to retain their savings and provide a guarantee secured against the equity in their own property. As a result the buyer is able to borrow up to 100 per cent of the property’s value.
Managing director of mortgages, Charles Haresnape, says: “The guarantee can be repaid at any time, or released if the loan falls to 75 per cent of the property’s value or lower. We’ve also limited the guarantee period to 10 years, giving guarantors clarity as to how long their commitment will last.”
Bath Building Society will also allow borrowers to take out a 100 per cent mortgage with its Parental Assistance Mortgage Scheme, provided the parents are willing to put up their own home as security.
Another option for parents is to take out a mortgage on a joint ownership basis with their children, meaning they are jointly liable for the debt. In some cases the lender will allow joint mortgage responsibility but the property can be kept solely in the child’s name, mitigating Capital Gains Tax liability for the parent.
Savings as security
Woolwich/Barclays’ Family Springboard Mortgage allows a family member to help the buyer onto the ladder by using their savings, without giving them up completely. The lender agrees to offer the child a mortgage with just a five per cent deposit, providing the parent offers some additional security – 10 per cent of the property’s value – at the start of the mortgage. The money sits in a separate savings account for three years, and earns interest. After three years it is returned to the helper, assuming all of the mortgage repayments have been made on time.
Sacrifice your savings
Another way to help your children with their mortgage is to offset your savings against their homeloan. This can help to reduce the child’s monthly mortgage repayments, which could be useful if they are about to start a family for example and will be managing on a reduced income for a year or two. Yorkshire Building Society’s Family Offset Mortgage allows parents to use their savings to help reduce their child’s mortgage in this way. Say, for example, the child has a mortgage of £200,000 and the parents have savings of £40,000. They may not want to hand this money over to their kids but are happy to sacrifice earning interest on the funds to help reduce their mortgage commitment.
The £40,000 is put into a savings account with YBS and effectively reduces the mortgage debt to £160,000, therefore cutting the interest payable to the lender. Depending on your lender and the type of deal, offsetting in this way can either reduce your monthly mortgage repayments, decrease your mortgage term by years, or a mixture of both.
Look before you leap
With half of first-time buyers requiring some form of parental assistance onto the ladder, the demand for mortgages that support this process is clearly growing. But any parent or family member considering acting as a guarantor on their child’s mortgage or putting aside their savings for a period of time needs to make sure they fully understand any potential pitfalls.
Hollingworth says:”A guarantor cannot simply walk away unless the child can take on the mortgage in their own right and satisfy the lender. It can therefore have an impact on the parent’s ability to borrow at a later date as they are liable for the debt even if they are not paying the monthly payments.”
Family mortgages are an innovative way for parents to help their children onto the property ladder without having to completely give away their money in the form of a deposit. Just ensure you fully understand your responsibilities as a guarantor before you sign up to your child’s mortgage.
Share the load
The Family Building Society combines the different features of mortgages that help families help each other onto the ladder. Parents can choose to assist their children in three different ways, picking and choosing what best suits them, or combining all three. These include:
Using your savings as security against your child’s mortgage to allow them to get a homeloan with a smaller deposit than they would otherwise be able to. Your savings remain in a separate account but earn interest
Giving the lender a charge over some of the equity in your property to allow your child to borrow more than they would be able to on their own
Offsetting your savings against your child’s mortgage account. By sacrificing accruing interest on your own savings you can enable your child to benefit from a lower level of interest on their mortgage.