In recent years, growing numbers of first-time buyers have become dependent on help from their parents in order to get onto the housing ladder. This has coined the phrase the ‘Bank of Mum and Dad’.
According to a report from Legal & General, across 2018 the Bank of Mum and Dad supported around 316,000 property purchases, worth a whopping £82bn.
However, there are lots of different ways in which parents can provide that assistance.
Perhaps the most straightforward way for parents to help their loved ones purchase a property is by gifting them money to go towards the deposit.
With house prices continuing to rise, the minimum deposit borrowers need to put together in order to purchase a property also keeps going up. To put that into perspective, the average price of a property in December 2013, according to the Nationwide house price index was £175,826, but by December 2018 that had jumped to £212,281. As a result, if you want to buy with a 10% deposit you now need to save at least £21,000, compared to £17,500 just five years ago.
It’s also worth remembering that larger deposits will mean that you can access lower interest rates on your mortgage deals, so even if you have a 10% deposit, a further helping hand from your parents could mean you can get hold of a cheaper loan.
When you take out a traditional mortgage, it’s solely up to you to make sure that you keep up with the repayments. If you fall behind on those payments, the lender can look to repossess the property.
However, with a guarantor mortgage, the guarantor - usually your parents - acts as a back-up. So if you don’t make the repayments, the lender can pursue the guarantor to cover them instead.
The guarantor’s financial position is taken into account when the lender works out how much they are willing to lend you, which may mean that you can borrow more than if you took out a mortgage on your own.
However, there are now very few lenders that actually offer guarantor deals.
Instead, many lenders prefer for parents to take out a joint mortgage with their children instead.
This is a little different to a guarantor mortgage, in that the parents will be named on the mortgage agreements and the property deeds. The lender will include both the parent’s income and the borrower’s when working out what they are prepared to lend, so again this can help buyers get a bigger loan that they might otherwise.
There is a significant possible downside to consider here though. If the parent already owns a property, then this will be classed as the purchase of a second property, which means an additional 3% stamp duty charge.
So while first-time buyers buying alone would pay no stamp duty in purchases of up to £300,000, if they buy using a joint mortgage with a property-owning parent, they would need to hand over up to £14,000.
Using their savings
Parents can also use their savings to help cut the cost of their child’s mortgage, without actually having to hand over the cash.
This is thanks to a type of deal called a family offset mortgage. Essentially the parent puts the money in a savings account that is linked to the mortgage, which is then essentially treated as a deposit.
So for example if you only had a 5% deposit, but your family were willing to put savings worth 20% of the purchase price in the linked account, you could purchase the property with a 75% loan-to-value mortgage rather than a 95% one. This can make a huge difference to the interest rates you can get hold of.