Rise in ‘security deposit’ mortgages where the Bank of Mum and Dad can earn interest
There are 40% more security deposit mortgages available on the market now than two years ago, according to Defaqto, which counted 28 such mortgages on the market.
It said that 13 providers now offer some form of security deposit mortgage, compared to eight providers two years ago.
How do they work?
‘Security deposit’ mortgages offer the parent or guarantor a less risky way than a traditional ‘guarantor mortgage’ to help the borrower afford a home and, in some cases, profit from it too.
With a security deposit mortgage, the friend or family member helping (helper) only guarantees the deposit or a set amount and is not liable for the whole mortgage. For example, they could guarantee £20,000 for a 10% deposit on a property worth £200,000. If the borrower does not keep up the mortgage repayments and the debt is called in, the family member is only liable for the £20,000 deposit and not the remaining £180,000 loan.
There are three types of security deposit mortgage available on the market:
This is where the helper gives a charge over some of the value of their home to provide security for the mortgage. For example, they could guarantee £20,000 against the value of their own home, without having to pay anything.
Linked savings deposit
This is where the helper has savings equivalent to the value of the deposit, e.g. £20,000 and is willing to tie these up as security for the mortgage. The helper would deposit their savings with the mortgage lender and would still receive interest on the deposit for a fixed period at the start of the mortgage (typically 3 to 5 years).
Offset savings deposit
These are similar to linked savings deposit mortgages, except here the interest earned on the savings is used to offset the mortgage interest. The helper would receive no interest on their cash and the borrower would benefit from a lower interest rate.
Defaqto found that the interest rates on security deposit mortgages compare very favourably with some of the best buy products for first-time buyers. It said that lowest five-year fixed rate on the market with a secured deposit is currently 2.75%.
Plus these mortgages offer an incentive for the Bank of Mum and Dad as well as their children. Linked Savings mortgage products offer better interest rates then mainstream savings products if money is invested for three years, with average interest of 2.50% compared to 2.32%.
Katie Brain, insight analyst at Defaqto, said: “With property prices so high, some young people are having to turn to family in order to get their first home. Not many people have the cash to put down a deposit for a relative’s home and security deposit mortgages can be a good alternative for them. The security provided via collateral charge or linked savings deposit only has to be committed for a fairly short period of time, typically 3-5 years, this can be released once the lender is satisfied that the borrower is able to keep up with the mortgage repayments.
“No security deposit mortgage is without risk and anyone who is considering helping out a borrower by providing security for the mortgage should get legal advice to ensure they fully understand what they are committing too. With traditional guarantor mortgages, the guarantor will be credit checked and their income taken into account for the first time buyer’s mortgage and it will need to cover the total loan amount. It’s important that borrowers read and compare the terms and conditions of these products because they do vary.”