Parents & first time buyers
In the current property market, the bank of mum and dad, or even granny and granddad, has been the only way for many people to buy their first home. With lenders requiring first-time buyers to put down large mortgage deposits to get a foot on the ladder– even where the mortgage repayments are perfectly affordable – parents and grandparents are raiding their savings more and more often.
That’s fair enough, though it often makes sense for parents and their children to sign a formal written agreement on any ownership rights or repayment plans. But what about those families who would like to help their children buy a first home, but don’t have savings they can afford to lend?
The good news is that mortgage lenders are increasingly recognising this niche in the market by designing products aimed at parents and grandparents who aren’t able to simply hand over a chunk of cash for the deposit. At Which? Mortgage Advisers, we can help you understand what deals are available for your circumstances – and talk you through all the options for helping your family members onto the property ladder.
Guarantor mortgages for first time buyers
Guarantor mortgages are one such option. These allow borrowers to take on larger loans than the lender would normally be prepared to extend if a close family member is prepared to act as a guarantor on the debt.
Typically, parents or grandparents offer their own homes as collateral on the children’s mortgage. They will need to have a decent chunk of equity in the property – 25 per cent is a standard minimum requirement – on which their children’s lender will put a charge. If the children keep up with their repayments, there’s nothing for the parents or grandparents to pay.
Nevertheless, there are pitfalls with guarantor mortgages. Above all, should your children default on their loan, you’ll be liable to make up the shortfall – you might have to remortgage your home to do so and in extreme circumstances, if you can’t pay, it could be subject to repossession.
Parents and family offset mortgages
A family offset mortgage is a different type of option. With these deals, parents or grandparents put their savings into an account linked to the child’s mortgage. The children can’t get at the money, but it effectively serves as a deposit on the property they want to buy. It also lowers interest charges, as the savings balance is deducted from the value of the loan.
The advantage of this type of deal is that parents don’t have to give their money away, though they will have to leave it locked up for an extended period – typically until the child’s mortgage is worth only 75 to 80 per cent of the property value. But it will eventually be available to them in the years ahead once again.
There are variations on the theme available. Lloyds Bank, for example, has a scheme where parents’ savings are used simply as security – they need to cover 20 per cent of the purchase price – but also earn interest. Children then need to find a deposit of only 5 per cent.
You should compare the rates you would get with these specialist mortgages with those of typical first time buyer mortgage rates.
Speak to an impartial mortgage adviser
All of these products are more complicated than standard mortgages, however, which means it is especially important to take impartial advice. Everyone involved – both children and parents or grandparents – needs to make sure they understand what the deal entails.
To discuss how you can help your family members take their first steps on the housing ladder, speak to a Which? mortgage adviser by calling us on 0117 981 7787 – or request a call back. Our advisers look at every mortgage from every available lender, and because they’re paid a salary – not a sales commission – you can have confidence that you’ll receive truly impartial advice.