Ways parents can help their children onto the property ladder
With property prices having continued their upward trajectory through the COVID pandemic, more first-time buyers are turning to their families for help in getting on the housing ladder.
Recent reports have identified that, in 2021, 84% of first-time buyers had some kind of parental assistance in buying a property. As a result, the Bank of Mum and Dad, if it were a financial institution, would be the 9th largest lender in the UK, giving some idea of the amount of parental support being provided in the UK housing market.
We take a look at the options which are available for parents who are considering giving their children a helping hand.
Raising a deposit is identified as the biggest barrier to getting on the housing ladder. This can be very frustrating for many hopeful buyers, who are often spending more in rent than they would on a mortgage.
Helping towards providing a deposit is the most common way in which parents help their children. There are 2 ways that these funds are provided, either as a gift or a loan.
If the money is identified as a gift, the mortgage lender will ask the parents to sign a document stating that they have no intention to reside in the property and there are no formal terms upon which the monies need to be returned. For a lender, there is nothing more they need to consider in their underwriting.
For parental reassurance, (if required) instructions can be established with the solicitor to protect the gift upon sale of the property, which can ensure the funds are either returned or just given to the children.
If the deposit money is provided as a loan, a mortgage lender will ask for the terms of the loan, including the monthly repayment, the term of the loan and if there is the intention to charge interest. These terms are then factored into the lender’s affordability as if it were a typical unsecured loan payment. In a similar way as a gift, instructions can be made to protect the funds if the property is sold.
If considering providing a deposit, it is worth being aware that the money will be tied up within the property and will not be easily returned unless through the sale of the property or refinancing in the future, which may affect some decisions around the amount that can be provided.
Joint Borrower, Sole Proprietor mortgage
This setup follows a similar guise to guarantor mortgages, whereby one or two additional applicants are added to the mortgage application and their incomes are used to increase the amount that can be lent to the child.
This in turn opens up the opportunity for the child to buy a property that may have been out of their reach if the multiples were solely based on their own income.
The biggest difference from a guarantor mortgage is that with a Joint Borrower and Sole Proprietor setup, just the child goes on the title deeds of the property as the sole owner. This saves the parents or supporting parties any additional stamp duty costs if they’re already a property-owner, making the total outlay for the purchase lower.
There are a good number of lenders offering these mortgages, many of whom are smaller building societies. With more lenders entering the market, competition is beginning to drive down the interest rates that can be achieved as well.
From a parent’s perspective, they would be required to step-in with the mortgage payments if they cannot be made by the child. Otherwise, it would affect their credit profile as well as their children’s.
There are a small handful of mortgage products that can lend buyers 100% of a property’s value. However, lenders require additional security, which they will then take a charge over.
This may require a lump sum of savings that needs to be held with them at a bank or building society for a period of time, perhaps 3 to 5 years, and this is then returned after that time has elapsed. This is not too dissimilar to providing a deposit, although there is a known return of funds date, which can be appealing to those not wanting to have all their savings locked up in a property.
An alternative setup is where lenders take a charge over an additional property, often the parents’ property. This way, a mortgage can be taken out on the child’s property for up to 100% of the property price and this property, and also their parents’ property, would act as security if the mortgage repayments weren’t met. It is therefore necessary to ensure that there is sufficient equity in the parent’s property for lenders to consider it as security.
Chase de Vere can help
It is really helpful for parents to have these options available if they are considering helping their children to get on the housing ladder. These options are not just restricted to first-time buyers but are available for all property purchases.
At Chase de Vere, we can provide both parents and children with advice around these areas, as well as more the more traditional mortgages. So please get in touch if you would like to explore the options available to you.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Content correct at the time of writing and is intended for general information only and should not be construed as advice.