It’s harder than ever for people to move up the property ladder. This has led to assistance from family being an important part of mortgage planning.
It’s common to think that providing a lump sum from savings is the only way to help. However, there are other ways that parents can help their children.
A family gifted deposit is the most common form of assistance when it comes to mortgages. There are variations on ways to achieve this, but essentially funds either come from savings/investments or equity released from property.
Which way is best depends on careful financial planning. First you find out which options are available. Then you look at the goal and objectives for all concerned. As much as parents want to help children, they also need to consider their own plans.
The aim is to achieve synergy through careful financial planning.
Guaranteeing a mortgage essentially means being liable should your children be unable to pay their mortgage. This will usually enable them to either borrow more and/or put down a lower deposit.
There are essentially two ways to help guarantee a mortgage – 1. With income 2. With security. Income is usually for people who can’t get the loan amount they need. Security is usually for people who don’t have the deposit they need.
If guaranteeing with income, parents will need to have enough income to cover their own expenditure along with further disposable income to support their children. This means that a lender will have additional security and therefore consider a loan amount which they would usually not offer. Not many lenders offer guarantor mortgages so an alternative could be a joint mortgage. However there could be higher stamp duty payable if the parent is already a property owner (a joint borrower sole proprietor mortgage could be more suitable here – see below).
An important point to note here is that the loan should be affordable for the child, both now and in the future. It’s also prudent to consider an ‘exit strategy’ – a plan for when and how the child can take sole responsibility for the mortgage and remove the guarantor element.
If guaranteeing with security, this is usually with savings or equity within property. This is a useful alternative to a gifted deposit should the parent not wish to gift funds away as they may be required for a future alternative use i.e. retirement.
Again, it’s prudent to consider an ‘exit strategy’ – a plan for when the guarantor requirement can be removed.
Joint Borrower Sole Proprietor
A joint borrower sole proprietor mortgage (JBSP) involves family members being able to go on to a mortgage, but not the deeds of the property.
This means that their incomes can be used to calculate the loan amount, but the second property stamp duty levy would not apply as they don’t own the property.
This approach is useful for people who aren’t able to achieve the mortgage they need based on their income alone.
There are restrictions here i.e. based on age and the number of lenders offering these mortgages. However, they are becoming more common place and some lenders allow up to 4 applicants (and incomes) which can really make a difference.
A key consideration here is affordability, both now and in the future. This approach can lead to achieving a far higher mortgage amount. However, even if the monthly payments are affordable, rates are very low at the moment so careful planning, stress testing and a viable exit strategy are important factors to consider.
To summarise, the good news is that the Bank of Mum and Dad is recognised as a key in today’s mortgage market. This has led to innovation from lenders resulting in parents being able to help their children more than ever before.
However, they are many options to consider and it’s crucial to make the right decision. With other issues such as liability, age, tax and personal financial planning, specialist and independent advice is recommended to ensure the best outcome.