I’ve had a number of clients recently asking me how they can help their children onto the property ladder.
It’s a hard fact that in the current market, because of increased property prices, stricter affordability rules and lower income multiples on offer, buying a first home is out of reach for many people. However, for those lucky enough to get help from the Bank of Mum and Dad, there are a few options.
The Guarantor Mortgage
This is when a third party (usually a parent) is named on the mortgage and acts as a guarantor for the monthly cost of the debt. The parent does not need to be on the deeds of the property to do this and so will not be liable to increased stamp duty, land tax or any capital gains tax usually associated with buying a second property.
I am currently looking at one of these mortgages for a client of mine who wants to purchase an investment property for his two children, both of whom are over 18 and in full time education. My client’s annual income is sufficient to demonstrate affordability allowing his daughters to purchase the property. The mortgage is held in all three names, though the property is held only in the daughters’ names.
When his daughters have left full time education and have sufficient income, we can look to restructure the mortgage in the name of the children and remove the parent from the mortgage.
One thing to consider: as the parent’s income is used for affordability, the term of the mortgage may be shorter as a lender will only allow this income to be considered until their proposed retirement age.
It is important in this scenario that the parent seeks independent legal advice so they understand their rights on borrowing funds secured against a property they do not own.
The Family Springboard Mortgage
These are a relatively new addition to the market and are in effect a 100% mortgage, used if a buyer doesn’t have enough for a deposit.
A third party (usually a parent or grandparent) provides 10% of the purchase price and this is held by the lender for 3 years.
The buyer borrows between 95-100% of the house value, depending whether they can provide any deposit at all. This means the child in question could effectively purchase the property without a deposit. The current interest rate you can expect is a 3 year fixed rate of 2.79%. The individual purchasing the property would still need to demonstrate affordability for their own mortgage but would be able to do so without the large upfront requirement of a deposit
The 10% held by the lender earns interest for the three years and all funds including interest are given back to the third party after three years.
Again, before the mortgage is agreed, the third party must seek independent legal advice, particularly regarding two important issues with this type of mortgage.
- If the buyer defaults on the monthly mortgage payment within the first three years, the lender can keep the 10% provided by the third party.
- If the property needs to be repossessed, the helper could lose money if there’s a shortfall between the money owed and the amount the property is sold for.
To understand your options, always speak to an independent, qualified mortgage adviser. Please get in touch if you have any questions.