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 your parents can help you take your first steps towards home ownership.
Family springboard mortgages:
By using a Springboard mortgage, you can put down a deposit at as little as 0%, effectively allowing you to secure a 100% mortgage. Your parents are then required to put down 10% of the property’s value into an account with your mortgage provider. These funds are unable to be withdrawn for a set period, usually five years, however your parents will attract a rate of interest on the amount they deposit. Providing you do not miss any repayments and your mortgage account is up to date, your parents 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, you should have realised enough equity within the property through your monthly payments, to be able to remortgage on to a lower loan-to-value product.
Essentially, your parents are acting as a guarantor that you will maintain your mortgage repayments for the first five years of the mortgage. After the five years are up, they will receive their 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 salary with your parents salaries will likely put you 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 and your parents are equally liable for the property. That means if you or your parents 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 parents 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 will be named on the title of the property, but you and your parents would be equally liable for the mortgage payments. Having a parent, or anyone else for that matter, would be for affordability purposes only, leaving them 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 your parents will not face the stamp duty surcharge of 3%, as required on all second home purchases. If they are already homeowners, they are not subjected to paying additional stamp duty, despite their involvement in a second home. Furthermore, financial risk applies to everyone involved, meaning should you default on payments, your parents are responsible for maintaining monthly repayments to the lender. In addition, you credit rating could affect your parents credit rating.
Once you have got yourself into a position where you have better financial security for the foreseeable future, and no longer require your parents assistance with the mortgage, your can remortgage to release your parents from legal responsibility.
It is advised you seek both mortgage and legal advice when considering such mortgages so that both you and your parents 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.
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 the child’s income. The mortgage lender will need to assess your finances, as well as those of your parents, to understand whether you are collectively a worthy investment.
This option is particularly relevant for those 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 parents. Some mortgage lenders will consider your parents income, in addition to your own, to help you secure a larger mortgage. Your parents will not be listed as an owner of the home, to avoid tax implications, but will have to prove that they can cover their own mortgage as well as your mortgage (assuming they still have a mortgage of their own).
If your parents are homeowners, they may wish to release some of the equity within their own property to make cash available to you for your own home. 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 you with the options above or, if they’d prefer, gift it to you.
They can either borrow against the value of their home or sell all or part of it in return for a lump sum or a regular monthly income (or both in some instances). Their 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 their property and allows them to remain living in the property for the rest of their lives. As no ownership of the property is lost, the property is sold when required, the debt is paid off and any balance retained by your parents or their personal representatives.
A lifetime mortgage allows them to release equity as a lump sum, a regular payment, or a combination of both.
Home Reversion Plans:
A home reversion plan allows your parents to sell part or all of their 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 their lives, rent-free. Should they still hold a share within the property, this will be reflected in the property value over time. In other words, should the value of their property rise, so will the value of their share.
Their home, or the part of it that they sell, will then belong to the reversion company, but they are allowed to carry on living in it until they pass away or move into long term care.
Our Equity Release calculator can help your parents to determine if this is an appropriate option for them. 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 and your parents. 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 getting help from your parents 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