A variety of new products are getting first time buyers a way onto the housing ladder – with a little help from the bank of Mum and Dad. Many of the products allow parents or grandparents to help their child or grandchild without having to permanently hand over any money. This is good news for families who have felt pressured by soaring house prices to downsize or hand over retirement savings.
The new products amount to 100% mortgages with conditions: lenders require the parent or grandparent to provide collateral which can either work by depositing cash into a savings account or allowing a charge to be placed against their own home.
The Barclays Family Springboard mortgage allows first time buyers to purchase with no deposit whatsoever – instead, parents or grandparents deposit the equivalent of 10% of the house value into a special savings account for a three year period. After three years, the savings are returned with interest (currently 1.5%). If the child defaults, the bank reserve the right to hold the money for a longer period. The mortgage rate itself is 2.99% for a 100% loan, or 2.79% if a 5% deposit is supplied. No arrangement fees are charged. Although stamp duty is still payable, the involvement of the parent or grandparent does not result in the new 3% ‘second home’ stamp duty rate being charged. After three years or so, the child is likely to have built up enough equity in their home to remortgage and get a better deal.
An alternative product for parents or grandparents who do not have a lump sum to deposit is a guarantor style loan. This is available if the ‘guarantor’ has at least 50% equity in their own home. Market Harborough offers a 100% mortgage if a guarantor allows a charge to be put on their home – amounting to 25% of the value of the property to be purchased. The charge is only drawn if the child defaults on their payments. This product is a five year discounted variable loan with 3.9% interest, although there are no early repayment charges after three years have passed. Again, the child could remortgage if there is sufficient equity in their property after three years has passed.
The Family Building Society is offering a ‘Family Mortgage’ product that gives borrowers with a 5% deposit the choice of finding a relative willing to deposit savings or finding a guarantor. Lending up to 95% LTV, the product requires that a family member either deposits 20% into a special savings account or accepts a charge on their home. With the deposit option, the money can only be withdrawn (with interest) by the relative when the Building Society have reviewed the linked mortgage account and give their permission. The interest on this three year fixed rate loan is 2.69%.
An additional product, the Family Offset account, allows a parent or grandparent to deposit their savings which are theoretically ‘offset’ against the outstanding mortgage, reducing the amount of interest payable. If, for example, the borrower took a mortgage of £70,000 and a family member deposited £50,000, the borrower would only be charged interest on £20,000. The savings also provide security for the borrower’s mortgage. The savings can be withdrawn in full by the parent or grandparent when the Building Society gives its permission.
The various family products offer a way for lenders to provide a 100% mortgage in a more secure and responsible way. They also allow parents or grandparents to help without having to eat into savings that they need for their retirement.