It’s now common for young people, particularly first time buyers, to receive a contribution from parents or other family members to help with a house purchase. With the need to provide ever increasing deposits, the Bank of Mum and Dad is now busier than ever- but how does it really work? It’s essential that parents and their children know the rules for both their own financial protection and peace of mind.
First Time Buyers
First time buyers are the life-blood of the housing market as without them no one can move. It used to be that the Buy-to-Let market helped fill this gap, but since the changes in tax, stamp duty and stricter rental stress tests, the Buy-to-Let market has seen a contraction.
If you’ve been looking at buying a house post lockdown, you might have head that mortgages for those with a 5% have been withdrawn and even with a 10% deposit are very difficult to get, so when you are considering which deal to choose, you need to look at what is realistically available to you with the savings that you have.
Mortgages exist for all levels of deposit – from 5% all the way to 40%+. But more recently it’s been harder to get borrowing with smaller deposits due to the COVID pandemic. It’s no wonder that the Bank of Mum and Dad are the 10 largest lender in the UK based on money lending, and that many first time buyers approach their parents and family members for a gifted deposit. It used to be that the gift had to be from a family member though many mortgage lenders will now accept help from a non-family member such as a friend. With first-time buyers still struggling to get onto the property ladder, many are joining forces with their partners, friends and family to combine deposits and incomes.
There are two specialist mortgages that can help first time buyers get on to the property ladder that many people aren’t aware of. With such bespoke mortgages that are only available from certain lenders, speaking to a professional mortgage adviser is really important.
Joint Borrower, Sole Proprietor (JBSP) Mortgage
This is a mortgage that is increasing in popularity because it means an applicant with a lower salary can get support from someone, usually a family member (depending on lender), to apply for a mortgage. The applicant that is supporting the purchase will not be named on the deeds to the property and means that, as a non-legal owner, they won’t be able to be entitled to any gain in the property’s value.
Generally, the lender will take the two highest incomes to work out affordability. This means that if you (and your mortgage advisor) are happy that the mortgage is affordable, but the lender says it doesn’t fit their affordability calculator, it can enable you to purchase a higher priced property. Budget is key, and both you, your parents and your mortgage advisor needs to be happy that you are not being overstretched.
These products still require a deposit of typically 15% at the moment though prior to COVID lenders were accepting as little as 5%. Parents or relatives can gift part or all of this deposit if required. The parents would be on the mortgage, but not on the property title deeds which means you can still take advantage of the current free stamp duty up to £500,000.
Only open to first time buyers (FTB’s)
As the relatives are also liable for the mortgage, any missed payments or if a repossession should occur in the future, it would also be against them too
Mortgage term is also limited by the parent or guardians age and existing mortgages and credit commitments which are all factored into the lender’s affordability assessment
These products are also age restricted, and the mortgage can only be entered into if the helping party is under age 60 at time of application and the mortgage term cannot take them past their 80 birthday
There are even some lenders that will take 3 or even 4 incomes into account, for example in the case of a couple buying the property with two parents supporting them. However, we feel that if this needs to be done to fit the affordability calculator of the lender, then the mortgage probably isn’t affordable in the first place and shouldn’t be pursued.
Family Springboard Mortgage
A family springboard mortgage comes in 2 parts. The borrower takes out a family springboard mortgage on a 5-year fixed rate, while the family member that is helping out (the ‘helper’), opens a ‘helpful start’ account linked to the mortgage. The helper would then deposit a 10% deposit into the savings account which then enables the borrower to buy a new property with effectively no deposit.
The money is kept safe in this linked savings account and actually attracts interest currently at 1.5% above the base rate. As long as the monthly mortgage payments are met by the borrower, the family member gets their full money back with interest at the end of the 5-year fixed rate.
From the borrower’s side, at the end of 5 years, the mortgage will go on to a ‘lifetime tracker’ rate with the lender but you have the option to review this with a view to switch it on to another mortgage product that suits your needs at that point.
From the helper’s side, you can help more than one family member or friend get their own place at the same time, and once you get your money back, you could use it again to help others.
This is not just limited to first time buyers either and can be used to help climb the property ladder. Because the borrower retains full rights over the property and the ownership, you fully benefit from the current zero stamp duty on property up to £500,000. Rates are very competitive, and at time of writing, vary from 2.85% with 5% own money deposit and 3.05% on 100% borrowing.
The helper is not able to access these funds should they need them for at least 5 years
This scheme is not available for new builds and the maximum loan is £500,000
If the borrower fails to keep up repayments on the mortgage, the money held on deposit is kept until the mortgage is made up to date, however if the property is repossessed at any time, the lender will use these funds to cover the cost of the repossession and paying the loan back
Prior to COVID there were other products in the market to help first time buyers such as the ‘family link’ mortgage from the post office, however these have been withdrawn in March, but they are expecting to relaunch this in the future.
With such bespoke mortgages that are only available from certain lenders, speaking to a professional mortgage adviser that works with many lenders is imperative. For advice on the right mortgage to suit your personal circumstances, please get in touch with us.
Your home may be repossessed if you do not keep up repayments on your mortgage.