Finding enough money for a deposit is often the biggest barrier for borrowers trying to get on or move up the property ladder. As property prices have increased, so has the deposit requirement for a property purchase, making it difficult for many buyers to find the funds required without help.
Many first-time buyers rely on the ‘Bank of Mum and Dad’ with research suggesting the average contribution is £24,1001. We explore four alternative ways you can aid that first step to home ownership.
Family springboard mortgages:
By using a Springboard mortgage, your child is able to put down a deposit as little as 0%, effectively allowing them to secure a 100% mortgage. You, as the parent, are required to put down 10% of the property’s value into an account with your child’s mortgage provider. These funds are unable to be withdrawn for a set period, usually five years, however you will attract a rate of interest on the amount you deposit. Providing your child does not miss any repayments and their mortgage account is up to date, your funds will be released after the defined holding period, along with the interest accrued during that period.
The principle behind the scheme is that after five years, the borrower should have realised enough equity within the property through their monthly payments, to be able to remortgage on to a lower loan-to-value product.
Essentially, you’re acting as a guarantor that your child will maintain their mortgage repayments for the first five years of their mortgage. After the five years are up, you will receive your money back, in addition to any interest it will have earned throughout that time.
This mortgage is particularly good for buyers who may be recent graduates and who have not had the time to save for a deposit. Similarly, it is suitable for individuals at the start of their professional career, who are expecting regular pay increases. The scheme is also attractive to parents or family members who want to help with a property purchase, but may not want, or be in a position, to truly gift a deposit. Some lenders even offer a 35-year term, making it a viable option for some of those trying to get onto the property ladder.
Combining your salaries will likely put your child in a far stronger position when it comes to purchasing a property. This can be done by taking out a joint mortgage whereby you are both owners of the property and equally liable. With this set-up there are two ways in which you can enter the mortgage agreement:
- Joint owners: whereby you are equally liable for the property. That means if you or your child default on payments, the other party is expected to maintain payments.
- Tenants in common: this is where you divide the shares between you and your child and are responsible for just your share.
Alternatively, you could opt for a Joint Borrower Sole Proprietor (JBSP), which is type of mortgage where not all parties on the mortgage are legal owners of the property. In other words, you would be equally liable for the mortgage payments, but only your child will be named on the title of the property. Having a parent, or anyone else for that matter, would be for affordability purposes only, leaving you with no legal right to the property, unlike with the joint mortgage specified above. As such, a JBSP mortgage is more commonly used between parent and child.
Both joint mortgages and JBSP mortgages will result in stamp duty, which the parent is equally liable for. However, with a JBSP you will not face the stamp duty surcharge of 3%, as required on all second home purchases. If you are already a homeowner, you are not subjected to paying additional stamp duty, despite your involvement in a second home. Furthermore, financial risk applies to everyone involved, meaning should your child default on payments, you are responsible for maintaining monthly repayments to the lender. In addition, your child’s credit rating could affect your credit rating.
Once your child has got themselves into a position where they have better financial security for the foreseeable future, and no longer require your assistance with the mortgage, you can remortgage to release yourself from legal responsibility.
It is advised you seek both mortgage and legal advice when considering such mortgages so that both you and your child understand the legalities and responsibilities involved. We can assist you with the mortgage and can work closely with your solicitor to help you achieve the best possible outcome for you and your child.
Acting as guarantor:
Mortgage lenders can incorporate parents onto their child’s mortgage as a guarantor, whereby the parent can undertake cover repayments should their child default or guarantee the extra portion over and above the amount covered by your child’s income. The mortgage lender will need to assess your finances, as well as those of your child, to understand whether you and your child are a worthy investment.
This option is particularly relevant for those with children who:
- Have no credit history
- Started a new job
- Have a low salary
- Have a low credit score
As with joint mortgages, it’s essential you seek both mortgage and legal advice for total clarity on the agreement between you and your child. Some mortgage lenders will consider your income as well as your child’s to help them secure a larger mortgage. You will not be listed as an owner of the home, to avoid tax implications, but will have to prove that you can cover your own mortgage as well as your child’s mortgage (assuming you still have a mortgage of your own).
If you are a homeowner, you may wish to release some of the equity within your own property to make cash available for your child. This option is available to those who are aged 55+ and either own their home outright or have a relatively small mortgage remaining on their house. The cash could be used to assist your child with the options above or, if you’d prefer, gifted to them.
You can either borrow against the value of your home or sell all or part of it in return for a lump sum or a regular monthly income (or both in some instances). The loan will be repaid at a later date when the property is eventually sold.
There are two main schemes through which you can release equity:
This scheme is designed so that the amount borrowed, plus and interest accrued, is typically repaid from the proceeds of the property when it comes to selling it.
A lifetime mortgage doesn’t involve selling any legal ownership of your property and allows you to remain living in the property for the rest of your life. As no ownership of the property is lost, the property is sold when required by you or your family, the debt is paid off and any balance retained by you or your personal representatives.
A lifetime mortgage allows you to release equity as a lump sum, a regular payment, or a combination of both.
Home Reversion Plans:
A home reversion plan allows you to sell part or all of your property to an equity release provider in return for either a lump sum or income, with the right to remain living at the property for the rest of your life, rent-free. Should you still hold a share within the property, this will be reflected in the property value over time. In other words, should the value of your property rise, so will the value of your share.
Your home, or the part of it you sell, will then belong to the reversion company, but you are allowed to carry on living in it until you die or move into long term care.
Our Equity Release calculator can help you to determine if this is an appropriate option for you. However, it is advised you always seek professional guidance when releasing capital from your house, for absolute clarity of the legalities and where such action would leave you. We have Financial Consultants and Accountants on hand to help, in addition to our Mortgage Advisers.
Securing any mortgage is never guaranteed as so many variables come into play. Take the stress out of helping your child with advice from a Cooper Associates Mortgage Adviser, who will have a wealth of experience in your lesser-known residential mortgages. Call 01823 273880 to arrange your free chat, with no obligation to business. Alternatively, complete an enquiry form and we will endeavour to get back to you as soon as possible.
1 Legal & General Research, 2019