Help your child get a mortgage

Published by Ruth Jackson on 11 September 2014.
Last updated on 11 September 2014

House as gift

House prices are rising in large swathes of the country, with UK prices up 8.8% in the last year alone, according to Halifax.

Over the past five years, the average house price has risen to £182,978. But wages haven't risen at anywhere near the same rate. Pay rises failed to match inflation for six years until February this year, meaning every year your pay packet has been buying you less.

Buying a house, therefore, has become harder for the young. The average salary is £24,648, according to the Office for National Statistics. That means the normal run-of-the-mill buyer needs a mortgage of £164,680, which is close to seven times earnings, plus a typical 10% deposit of almost £17,000. With Bank of England governor Mark Carney recently capping the income multiple for mortgage lending at 4.5, more potential first-time buyers will likely need some help getting on the ladder.

The answer used to be simple - parents would step in and help them get a guarantor mortgage, promising to cover their mortgage repayments if they couldn't. Unfortunately, guarantor mortgages are much harder to get now. Many lenders, including NatWest, RBS and Newcastle Building Society, have pulled their guarantor products, citing a lack of demand now the government-backed Help to Buy option is available.

In reality, mortgage brokers say that tighter lending criteria has made it almost impossible for anyone to get a guarantor mortgage and that is why they are disappearing from the market.

"It may be down to lenders reviewing the more niche areas of their business and deciding to get rid of more complicated areas that still represent only a small amount of business," says David Hollingworth of mortgage broker London & Country.

"Lenders have also become increasingly cautious and new lending rules place particular focus on demonstrating mortgage affordability for borrowers will be sustainable."

For parents, guarantor mortgages are more tricky now as lenders are much stricter about lending to people beyond retirement age – they aren't convinced you'll be able to afford the repayments on a pension so have age cut-offs.

This means that the mortgage term is much shorter, pushing up the monthly repayments and then your child fails the affordability tests. They also dig into your own financial situation a lot more.

"Affordability is a major issue," says Kirit Lakhani, senior partner and co-owner of estate agent Charles Derby Estates. "Only those fortunate members of society who have little or no mortgage on their residential home, have a substantial income and are relatively young would be eligible to be a guarantor."

A first-time buyer needs to be in a very specific situation to be applicable for a guarantor mortgage. As the idea is that your parents guarantee your repayments until you can afford them, you need to show the lender what will change so you can afford the repayments alone in the future.

This means you need to be in a career where your salary will rise significantly in the near future. For example, you are a trainee solicitor or doctor. But, even then it is still getting very difficult to get a guarantor mortgage. "We struggled to convince a lender that a 24-year-old Cambridge graduate working as a hedge fund headhunter would be earning more in five years," says Adrian Anderson, director of mortgage broker Anderson Harrison.

Find the best mortgage for you

Use your own home as collateral

However, there is a new breed of guarantor mortgages that are easier to come by but they come with significant drawbacks. These products will lend you up to 100% of the value of the property if the guarantor puts their own property up as collateral. So if the person living in the mortgaged house falls behind with their repayments, the guarantor could lose their home.

Bath Building Society and Aldermore offer this type of mortgage. They could be appealing if you know that you can afford to cover the repayments if your child can't. But think very carefully before going ahead as there may be a better option that doesn't involve risking your own home.

Of course, being able to help out with the deposit is the ideal scenario for many parents, and a recent survey by Standard Life found that 14% of parents have helped put down a deposit on their child's first home.

The advantages of doing so are obvious – it helps them secure the mortgage in the first place, and the bigger the deposit the buyer can put down, the more access they'll have to lower interest rates and more affordable repayments.

However, if you are considering doing the same for your own younger family members, there are certain pitfalls to be wary of. For instance, opting to loan them the money rather than gifting it can cause problems with affordability on their mortgage as the lender will factor in any repayments your child has to make to you.

It can also have tax implications. For instance, if you choose to own a percentage of the house as a result of the money you give, you could find yourself liable for capital gains tax. So you may find that having an informal arrangement for any monies to be repaid – for example, when your child remortgages – will avoid many tax issues (as long as you aren't making a profit).

Even if you're in a fortunate enough position to simply gift the money outright, be aware the money will be liable for inheritance tax if you die within seven years of giving it away if your estate is valued at more than the £325,000 allowance.

Help with the deposit

If you have cash in the bank that could help out your child but don't want to give them the money, a linked savings mortgage might be the answer. With this type of offset mortgage, you put your cash into a savings account that is counted as part of the deposit but you never give up ownership of the money – so no inheritance tax issues or worries that your child will never pay you back.

"This type of mortgage is becoming increasingly popular as it is a great way to help bump up your child's deposit to get improved mortgage rates," says Katie Myers, branch manager of property consultancy Keppie Massie.

Barclays offers a Family Springboard mortgage (through its Woolwich mortgage arm) that requires a family member to put 10% of the purchase price of the house into a 'Helpful Start' savings account linked to the mortgage. The borrower needs to put up a further 5% deposit, then gets a three-year mortgage at 3.79% – that is a much lower rate than offered by any Help To Buy mortgages.

So long as the borrower makes their repayments on time over the three years, your savings will be returned to you with interest paid at the bank rate (currently 0.5%) plus 1.5%.

Market Harborough Building Society also offers a similar product called the Family Deposit mortgage but it requires a family member to put down 20% in a savings account for five years.

An alternative if you can't help get a deposit big enough to get your child their dream house (or any house) is to take out a joint mortgage with them. With this, both your income and your child's income are taken into account when calculating affordability, which can help your child borrow more.

Affordability criteria are incredibly tight now, so it is entirely likely that your child will still be able to afford the repayments on their own. This is also a good option if your child's income is expected to rise significantly in the near future, at which point you can be removed from the mortgage.

Many lenders will allow parents to go in on joint mortgages but some also have special products for these scenarios. Coventry Building Society offers a Step-Up mortgage to first-time buyers where family members can be removed once the main borrower meets the affordability criteria on their own. Barclays has a Family Affordability Plan that is available on all its mortgages that allows parents or grandparents to appear on the mortgage but not be co-owners, avoiding any capital gains tax liabilities.

Of course, not all of us can afford to lock up a large sum of money in our child's house. On the average house price, you would need to have close to £20,000 to hand to provide a 10% deposit. Some parents get around this by taking out a personal loan to help their child with their deposit (find out how this works in the case study of Vicki Brewer on page 61). But however you end up helping your child out, it is worth getting some financial advice before taking the plunge.

A recent survey by Halifax found that 38% of parents who had contributed to their child's house deposit were now concerned about their own finances as a result. Don't become a part of that statistic by making sure you only give what you can afford to be without. Also, be clear and comfortable with any risk that you are taking on.

"If you are contemplating lending a hand to your children, my best advice would be to speak to a professional about your different options before you commit to anything," says Myers.

How Help to Buy works

If you aren't in a position to help your child get a house, the government may be able to step in and assist them instead. Help to Buy is a scheme for anyone who is struggling to find the deposit for a home worth up to £600,000.

As long as you can provide a 5% deposit, the government will help you get a mortgage. If you are looking to buy a new-build home, it will loan you up to 20% of the value of your home so that you can get a mortgage on the other 75%. You won't pay fees on the government's loan for the first five years.

If you are not buying a new-build, then the government offers mortgage lenders the option of taking out a 'mortgage guarantee' on part of their lending. This means they can lend you 95% of the value of your home, knowing the government will cover part of that money should you fail to repay.

The downside to Help to Buy is that the rates offered by lenders are high – currently the best buy is a two-year fix at 4.79% from HSBC. In contrast, the best buy 90% LTV mortgage on the open market has a rate of just 2.45% from Furness Building Society. So, just being able to help boost your child's mortgage a small amount or go in on a mortgage with them can save a lot of money.

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