Top 5 Ways Parents Can Help Kids Onto The Property Ladder.
It is not so easy to save a 5% or 10% deposit to buy your first house. Add to the fact that whilst all the while you are saving, property prices are increasing by 8%, 10% or in the case of London around 20% per year! Then add to that the property prices are at an all-time high, above the pre-recession values of 2007, but wages have failed to increase in line and you have a real battle on your hands to be able to afford a mortgage where you need to borrow 90 or 95% of the property value.
We see this struggle through many of our First time Buyer enquiries and so we set out to find out what other options there are and to bring these options forward so that more of Britain’s budding home owners can get on the housing ladder.
- Gift from Mum and Dad/Family
If you are lucky enough to find yourself with the offer of a gift of money from a family member then that is a perfectly plausible way to fund your deposit. Nearly ALL mortgage lenders will accept a gifted deposit from a close family member. The lenders generally determine a close family member as Mum, Dad, Brother, Sister or Grand-Parents. The lender will need a letter confirming that the deposit ‘is a gift, is non-repayable, and that the person making the gift will have no interest in the property’.
- Joint mortgage with a parent
If you can convince Mum or Dad to go joint on the mortgage then this is a feasible option but it does have its constraints.
After the Mortgage Market review in April 2014 lenders decided to either not lend into retirement or to require proof of pension for lending into retirement with most now only lending to age 75. As a result, having a parent go joint applicant with you on a mortgage will limit the loan term up to the eldest applicants retirement age and so a joint mortgage where the eldest applicant is 55 may only allow for a 10 year term and as interest only mortgages are hard to put in place (also due to the MMR) then you will be faced with crippling repayments over a short period of time which will often make this option unfeasible.
Additionally, any existing debt including mortgages are taken into account and deducted form income. Essentially, for this to work the parent will ideally be in their 40’s or early 50’s and have a good earnings to debt ratio.
- Guarantor Mortgages
These work in the same way as a joint mortgage with a parent as lenders will assess affordability and
Will also factor in age. The difference from a joint mortgage is that a guarantor mortgage does not require the Guarantor to be named on the deeds. Guarantor mortgages are only available where the client needing the guarantor is in some form of career path whereby they will earning sufficient income in a few years to take on the loan in their own capacity. An example would be a trainee lawyer who needs a guarantor for 2 years until they qualify at which point their salary will increase to a sufficient amount to take on the loan themselves.
- Parents use their property as collateral
Several Banks have come up with innovative solutions to allow parents to help their children by offering up their own property as security for the loan.
Bath building society will lend 100% to a first time buyer for a property value of up to £300,000. The lender will require the parents to have a charge placed on their property and the loan to value on that property must not exceed 65%. In this situation we would advise both parent and child to get separate legal advice.
This option is very useful where the parent does not have the liquid cash to gift their child but does with to help them get onto the ladder. There is other criteria to consider and you should discuss your situation in full with your broker to ensure you meet the lenders criteria.
- Parents deposit cash with the lender
Several banks offer this option too, one of which is Woolwich. This taken from their website best describes how the parent assisted mortgage known as the ‘Family Springboard Mortgage’ works:
The Family Springboard Mortgages comes in 2 parts. The borrower takes out a Family Springboard Mortgage, while their helpers open a Helpful Start Account, into which they put 10% of the house price.
This means we can offer the borrower a 95% mortgage, with them only requiring a 5% deposit. After 3 years, the Helpful Start Account is closed and the helpers get their money back with the interest earned, provided that the borrower has kept up to date with the mortgage repayments.
As well as helping your clients meet the financial goals of them and their family, the Family Springboard Mortgage provides you with fresh opportunities. To help you capitalise on the potential, we’ve produced a range of sales support material for you to use with your clients.