How your family can help you buy a home

Keys

Your parents would love to help you onto the property ladder – they just don’t have a huge lump sum to give you. Fortunately there are other ways for them to help, from guarantor mortgages to family flexible mortgages. We take you through the main options, and their pros and cons.

As a first-time buyer today, you have it much tougher than your parents did. House prices are continuing to rise above the rate of inflation, while earnings stay relatively stagnant. This means that every year you delay getting onto the property ladder makes it harder to do so, and you’re always playing catch-up.

Even if you yourself feel confident that you can afford a home, you may face any of these problems:

  1. Mortgage providers won’t lend to you
  2. You can get a mortgage, but the deal is too expensive
  3. You could get an affordable mortgage if you had a bigger deposit – which you don’t

For many, one way to break this cycle is to ask parents for help. Sometimes they may be able to help out with money for a deposit – but even if they can’t, Mum and Dad can still improve your mortgage prospects without permanently parting with their cash. Three popular solutions are the guarantor mortgage, the family deposit mortgage and the family offset mortgage.

What is a guarantor mortgage?

When you take out a guarantor mortgage, your parents (or another close family member) put up security to cover the debt. In other words, your guarantor agrees to pay off your mortgage if you can’t.

A guarantor mortgage can let you borrow up to 100 per cent of a property’s value – in which case you would not need any deposit. Your guarantor (e.g. your parents) may have to guarantee all this amount, but sometimes the amount is capped, e.g. at 75 per cent. Usually your guarantor will put up their own home as security, so they could lose this if you default on repayments. Of course it should be possible to sell the property bought with the guarantor mortgage, but if property prices fall then this may not fully repay the loan.

Anyone agreeing to be the guarantor on your mortgage is taking on a significant risk for you. That said, if you keep up repayments then it will not cost them anything.

What is a family deposit mortgage?

The term ‘family deposit mortgage’ has been used to describe two quite different arrangements.

The first type involves your parents depositing a lump sum in a special savings account for a period of time, to serve as security on the loan. If you default on your repayments during this time, then the shortfall will be taken from the savings account. Again, if you keep up repayments, your parents won’t lose any of their money. At the end of the secured period they can withdraw their money from the account – which may even pay interest.

Another form of family deposit mortgage works in a slightly different way. Your parents can borrow a lump sum against part of the equity in their home (i.e. the part of their home that they have already paid for). You can then put this lump sum towards the deposit on your first home.

If you are looking into something called a ‘family deposit mortgage’, make sure you’re clear which type of arrangement it is, and what the pros and cons might be for you and your family.

What is a family offset mortgage?

Another alternative is a type of offset mortgage. As with the family deposit mortgage, it is an option if your parents have a large lump sum they don’t immediately need (but want to keep for future use). Once again, the money is placed into a special savings account that is linked to the mortgage.

The difference here is that, rather than earn interest itself, the money ‘offsets’ (i.e. reduces) the interest on the mortgage. As a result, the monthly repayments are cheaper than they would otherwise be.

Depending on your circumstances, a family offset mortgage may result in a more affordable mortgage than a family deposit mortgage. The main drawback is that the money in the account may be locked away for a longer period of time. Usually the money will be inaccessible until you have paid off at least 75 per cent of the mortgage. Against that, the reduction in the mortgage repayments may well exceed the growth that could be achieved by putting the money in a savings account.

Which option is best for you?

These are just the most common ways in which parents (or close family members) can help first-time buyers get on the property ladder without actually gifting large sums of money.  Comparing the advantages and drawbacks of each will depend on the plans of both yourself and your parents, in the short and long term.  For this reason, it’s a very good idea to see an independent mortgage adviser before making any such decisions, so you can work out exactly what these plans are.

 


The above article was first published by unbiased on the 11th April 2017