First-time buyer mortgages: How Mum and Dad can help
By Kate Saines
At the moment the average age of first-time buyers in the UK is 30. If we continue to put off saving money this could increase to 44, a study revealed last week.
This piece of research, released by Scottish Widows, was no doubt mean to shock us all – but it's unlikely many of us would be too surprised.
You don't have to be a financial expert to know that a combination of high house prices, lenders' demand for big deposits, minimal pay increases and buyers' lack of savings are making it increasingly difficult for people to make their first move on the housing ladder.
But one method being employed by aspiring home owners in a bid to bag their first property is to tap into their mum and dad's finances.
Yes, just when you thought the apron strings had finally been untied and independence was looming, it appears the folks are just as essential as they've ever been.
And in response to this trend lenders have developed products specifically for first-time buyers who are receiving finance from their parents or another relative.
There are several on the market, but there are also some other ways you can get your parents' help without searching for a niche product.
Apply for a mortgage with your parents
Don't worry – we are not suggesting you and your partner move in with your mum and dad. But you can still put their name on the mortgage application.
This will make you a more appealing bet for the lender because there are two main hurdles to being a successful applicant to a mortgage.
Firstly, you need a big deposit – these days it's rare any mortgage will require less than 15 per cent of the value of the property.
Secondly, you need to be able to afford monthly repayments, which means having a sufficient salary.
With so many first-time buyers being unable to stump up a deposit, and also not earning enough these hurdles are totally insurmountable.
But if you have parents with these assets, the challenges will seem a little less onerous.
According to Halifax, just over a quarter of parents it surveyed on the role of the 'bank of mum and dad' understood that there could be multiple applicants on a mortgage.
In fact, there can be up to four names on an application and the decision on whether a mortgage can be granted will be based on the two highest earning applicants.
This is a particularly good method for first-time buyers who perhaps have a bit of a deposit but don't have the salary, but who also have parents with a good income.
Stephen Noakes, Halifax's commercial director for mortgages, said: "Times have changed – traditionally first-time buyers turned to their parents for a hand-out but for many giving a deposit or paying off debts is not financially viable."
There are pitfalls to this method. If you are 'child' striving for independence from your parents you might find having their name on the mortgage a knock to the pride.
Likewise, should your parent lose their income or become unable to make the repayments there will be problems.
But, this is not the only route if you want some parental help.
Mr Noakes urged first-time buyers and their parents to gen up on the various options available to them.
"Whilst it's important that first-time buyers understand everything that is involved in buying a home, for many parents getting a better understanding of the state of the market and the range of products available today may make a difference to homebuyers and parents alike."
Use the Myfinances.co.uk comparison tools to find the best mortgages for a first-time buyer
Guarantor Mortgage
According to Halifax, just one in five parents had heard of guarantor mortgages.
Unlike the previous option, the buyer themselves is the main mortgage holder. Their parent – or other friend or relative – simply acts as a guarantor.
The guarantor does not part with a penny, they simply pledge that if the mortgage-holder defaults or becomes unable to make their repayments, they will take on the debt.
There are different kinds of guarantor mortgage. Full liability mortgages involve the guarantor guaranteeing the entire loan. Limited liability mortgages, meanwhile, require the guarantor to simply put up security for a part of the mortgage – the percentage the applicant cannot afford.
There are specific tailor-made guarantor mortgages available, but some lenders offer guarantor versions of their mainstream mortgages.
On the plus side they offer first-time buyers the chance to get a mortgage in their own right.
The disadvantage, however, is that they are not a long-term solution. Lenders tend to limit these mortgages to applicants with high-earning prospects – for example trainee doctors, or other professionals at the start of their careers - who they expect to earn more later on in life.
This is because they will want them to be able to afford a mortgage on their own eventually.
Savings-linked mortgages
Lloyds TSB has cornered the market with its Lend a Hand scheme which allows a relative to put up their savings as security on a first-time buyer's mortgage.
Applicants could receive a mortgage of up to 95 per cent loan-to-value (LTV), on the three-year products.
It works by Lloyds TSB taking legal charge of the parents' – or another relative's - savings account for the duration of the mortgage. The savings must be equal to 20 per cent of the value of the property involved.
Whilst Lloyds are in charge, the relative will still receive interest on their savings (currently four per cent).
At the end of the term, the legal charge is removed and the applicant can run the mortgage independently, provided mortgage repayments and house price rises have moved forward enough that the mortgage has dropped to 90 per cent LTV.
Lloyds TSB explained that by having legal charge on the savings account, it could offset the risk of lending at 95 per cent LTV to offer a realistic and affordable option to first-time buyers.
Rachel Broadbent, a teacher, managed to get a mortgage though the Lend a Hand scheme after being turned down elsewhere.
She and her partner had a low credit score, had been declined by HSBC and thought there was no other alternative until her parents found out about Lloyds TSB's scheme.
Thanks to Rachel's grandfather, who put up his savings, they managed to get an 80 per cent offer through Lend a Hand. Although this was not the 95 per cent they were looking for, because of the flexibility of the scheme, they managed to get a mortgage which suited their needs.
The obvious advantage to this method is that it provides a win-win scenario for all involved. The parents do not pay a thing, although they obviously cannot dip into their savings, and they receive a reasonable rate of interest.
The buyers benefit from getting a better shot at taking out a mortgage but remain independent from their parents.
The difficulties occur if the buyers default or fall behind on their mortgage. Like guarantor mortgages, Lend a Hand relies on a strong and trusting relationship between parents and their offspring.
Releasing Equity from Parent's Property
Parents who own their own home, and have seen its value soar since they first moved in, are likely to have plenty of equity in their home.
Another method being applied by the Bank of Mum and Dad to create finance for sons or daughters is to release some of this equity to help them buy their first home.
According to SHIP, the trade body for equity release, older relatives are increasingly latching on to this idea because they can actually see the benefit their contribution is making first hand.
Andrea Rozario, director general of SHIP, said there was once a perception that equity release products were for people in financial difficulties.
However, they were now seeing the products used for home improvements, creating a better quality retirement and as a form of pre-inheritance for younger dependents.
She added: "Even though house prices have seen a slight decrease in value over the last few years and mortgage providers tighten their lending criteria, young people are finding it still very difficult to take that first step onto the housing ladder.
"However, older relatives who have built up a certain amount of housing wealth over time may well be in a position to help them."
Use the Myfinances.co.uk comparison tools to find the best mortgage for a first-time buyer.
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