What are the options for parents and first-time buyers?
In the current property market, the bank of mum and dad, or even gran and granddad, has helped many people to buy their first home.
With many people struggling to save up a deposit to get a foot on the ladder, parents and grandparents are raiding their savings more and more often.
For people in this situation, it often makes sense for parents and their children to sign a formal written agreement on any ownership rights or repayment plans. Our guide on gifted deposits explains how this works.
But what about those families who would like to help their children buy a first home, but don’t have savings they can afford to lend?
The good news is that mortgage lenders are increasingly recognising this niche in the market by designing products aimed at parents and grandparents who aren’t able to simply hand over a chunk of cash for the deposit.
What are guarantor mortgages for first-time buyers?
Guarantor mortgages borrowers to take on larger loans than the lender would normally be prepared to provide if a close family member is prepared to act as a ‘guarantor’ on the debt.
This means that parents and grandparents put themselves and their property on the line should their children or grandchildren fail to make their repayments,
Typically, parents or grandparents offer their own homes as ‘collateral’ on the children’s mortgage.
You will need to own a decent amount of your property – 25% is a standard minimum requirement – on which your children’s lender will put a charge. If your children keep up with their repayments, there’s nothing for the you to pay.
Nevertheless, there are pitfalls with guarantor mortgages. Above all, should your children default on their loan, you’ll be liable to make up the shortfall – you might have to remortgage your home to do so and in extreme circumstances, if you can’t pay, it could be subject to repossession.
What are family offset mortgages for parents?
A family offset mortgage is a different type of option.
With these deals, you put your savings into an account linked to your child’s mortgage. Your children can’t access the funds, but the pot of savings you put aside effectively act as a deposit on the property they want to buy.
It also helps them secure a lower interest rate, as the savings balance is deducted from the value of the mortgage, meaning they can secure a mortgage at a lower loan-to-value.
The advantage of this type of deal is that you don’t have to give your money away, though you’ll have to leave it locked up for an extended period. This could typically until the child’s mortgage is worth only 75% to 80% of the property’s value.
Lloyds Bank and Barclays are two big high-street lenders offering mortgages that require you to deposit savings in an account as security. The big advantage is that by doing so, your children only need to put down a 5% deposit, and you can earn interest on your savings at the same time.
What are joint mortgages for parents and children?
Alternatively, you could partner up with your child to get a joint mortgage.
You’ll both be named on the mortgage agreement and the deeds of the property, and both of your incomes will be assessed for mortgage purposes. You can find out more about this in our guide to joint mortgages.
However, if you already own a property, you and your child will have to pay a higher rate of stamp duty, as the government considers this to be a second property, and in England and Wales, have to pay 3% extra stamp duty.
Find out how much this could be using our second home stamp duty calculator.
There is a variation of this arrangement which could cut costs. It’s known as a joint borrower, sole proprietor (JBSP) mortgage. With these deals, you and your child’s income are assessed for the mortgage, but you are not named on the property deeds.
It means that your child pays stamp duty rates as a first-time buyer – which is 0% for properties under £300,000.
Use our stamp duty calculator to work out what kind of bill your child might face