Help your kids buy a house without handing over stacks of cash
Young people trying to get on the property ladder are relying more and more on the ‘bank of mum and dad’ to help with their deposit.
Research published last week by Santander shows one in three first-time buyers expects to ask for a family loan to help purchase their first property, more than three times the number of current homeowners who asked for financial help from their families.
While some parents are in the fortunate position to handover a sizeable chunk of cash to help their kids buy a home, this is not a feasible option for all families.
Luckily, there are alternative options for parents who still want to give their offspring a helping hand.
Here are four to consider:
The Barclays Family Springboard Mortgage allows first-time buyers to take out a mortgage without a deposit. Instead their parents pay a 10% deposit into a savings account linked to the mortgage.
At the end of the three-year term, as long as the child has kept up with repayments, the parents get their money back with interest.
Buyers can get a three-year fixed rate mortgage at 2.99%.
If the borrower misses a payment, Barclays will retain their parents’ money for a longer period of time than initially agreed.
“This is a pretty innovative way to help the kids without putting a charge on the parents’ home as several other schemes do, nor do they have to raise money against their home,” says Simon Collins, product technical manager at mortgage broker John Charcol.
“The main thing to check is what the difference in rate would be if they used the money for the actual deposit and therefore their offspring could get a much lower rate of interest.
“However, in terms of retaining control of their money, this is the one that gives mum and dad the most certainty.”
Joint borrower/sole proprietor mortgages
Metro Bank and Barclays offer these types of mortgage, which enable parents to help their child by one of them going on the mortgage using their income to boost the overall affordability, without being named on the title deeds at Land Registry.
The main benefit of this option is the parent does not have to pay the additional 3% stamp duty surcharge on second properties, which was introduced last year. They also won’t have to pay any capital gains tax when the property is sold.
The downside is if the parent wants to borrow extra money, remortgage or move home, then their child’s mortgage that they are party to will have an impact on their overall affordability.
“The parent also needs to be young enough to still be able to take out a decent length mortgage term,” says Collins.
Adrian Anderson, director of mortgage broker Anderson Harris, says: “The other advantage is that as long as the child can prove to the bank they can afford the mortgage in their own right at a later date, then the parents can be released from their obligations.”
With a guarantor mortgage, parents or a close relative cover any repayments missed by the buyer.
Anderson says: “Lenders have been moving away from guarantor mortgages so they are now a niche product, which means rates can be higher than on non-guarantor options.
“Guarantor mortgages are mostly available from building societies, such as the Bath Building Society Parental Assistance Mortgage Scheme and the Family Building Society Family Mortgage where wider family assets can be taken into account as security. Challenger bank Aldermore also has a Family Guarantee Mortgage.”
Buyers can get a three-year Bath Building Society Parental Assistance Mortgage at 3.04% – a 2% discount off the Standard Variable Rate (SVR), which is currently 5.04%. It can be purchased at 100% loan-to-value so no deposit is required.
Taking equity out of the family home
Parents could remortgage their own property to raise the deposit for their child’s new home.
This is the most common form of withdrawal from the ‘bank of mum and dad’.
According to Collins, it can also be the cheapest as often the parent’s property has got some sizeable equity, meaning they can take advantage of some of the lowest rates going.
“Most lenders will accept gifted deposits, but that does mean losing control of the funds, and having a new/bigger mortgage on their main residence,” he says.