A little of the family fortune and your child won't be frozen out of housing
Joint mortgages, 'guarantor' deals... how parental support can counter the problem of high prices
Sunday 18 December 2005
Most twenty- and thirtysomethings who dream of their own home would trade all their Christmas gifts for a first foot on the property ladder.
They won't find it under the tree, perhaps, but they may be pleased to know that the goodwill of their parents isn't just for Christmas. For a quarter of first-time buyers now rely on financial support from their families, says Helen Adams, the director of ParentAidNow .co.uk, a new advice website.
"Helping your child buy their first home is different to 20 years ago," she says. "As house prices have risen so far ahead of earnings, the support of parents has become even more necessary.
"There are also many more ways to help now," she adds, the first being the traditional one of giving your child the deposit.
If left to their own devices, it would take a first-time buyer four years and nine months to save the £7,652 that now equates to 5 per cent of the average property price, according to new research from National Savings & Investments (NS&I).
Any parent who can reduce the amount their child needs to borrow in this way will open the door to cheaper mortgage deals from high-street lenders.
An alternative for those with a monthly income is to take out a joint mortgage with their child and so boost the amount borrowed according to the lender's income multiples.
However, a joint loan means the names of both parent and child feature on the mortgage agreement - so each party will usually be jointly liable.
Note also that most lenders insist the parent's name appears on the property deeds, which can result in capital gains tax and stamp duty liabilities if the parent sells their part of the house to the child at a later date.
To overcome the tax hurdles, brokers and intermediaries have designed loans such as 1st Start from Bradford & Bingley (B&B). "This focuses primarily on the parent's earnings, allowing the first-time buyer to borrow four times their parent's income added to their own," says Duncan Pownall at B&B.
"But although their name will be on the agreement, the parent can choose to exclude it from the property deeds, which can help with potential tax liabilities."
Alternatively, a parent can act as a "guarantor" for the shortfall between what their child needs to borrow and what their salary permits.
If, say, they earn £20,000 a year, they can qualify for a £70,000 loan on a lender's income multiple of 3.5 times a single salary. If the mortgage required is £120,000, a parent can be guarantor for the other £50,000.
Some lenders, such as the Nationwide and Yorkshire building societies, now offer a guarantor facility across a broad range of standard mortgage products such as two-year fixes and discounted deals - provided the child shows the potential to manage the whole loan in the near future, usually within five years.
With most guarantor mortgages, parents will have joint responsibility for the whole loan. But with some deals, such as the one offered by Scottish Widows, they will have to guarantee only the shortfall sum.
Arrangements like these aren't always made to measure for all-comers. For example, the guarantor deal available from Newcastle building society is only for young professionals who anticipate a steep rise in earnings.
Elsewhere, the Co-op bank's new Parental Guarantor mortgage is available to all borrowers but has restrictions: the maximum amount that the parent can guarantee is just 1.5 times their salary.
However, the Co-op says it is flexible both about the relationship of the guarantor to the borrower - it doesn't have to be the parent - and the definition of income.
"We would look at any monthly dividend such as a salary, pension or even rent from a buy-to-let property," says spokesman Andy Hammerton. "Additionally, the parent does not need to feature on either the mortgage agreement or property deeds."
However, a special guarantor deed must still be signed that makes the parent liable with, or instead of, the borrower.
Even if your children have already bought a home, it's not too late for parents to step in and help. By switching the deal to a family offset mortgage, the parent's savings can be set against the child's loan, so reducing the amount on which interest has to be paid.
Yorkshire building society is the latest lender to launch a version of this arrangement, with a product called Offset Plus. "This type of mortgage might not help with getting on the ladder but it will considerably reduce the interest on the debt," says spokes- woman Tanya Jackson.
"Anyone, family or friend, can link their savings to the debt and retain full control of the money. Although they will not earn interest on it, this means that no tax is paid."
Mum's the word in getting a mortgage
Helly Seeley, a 26-year-old marketing manager, bought her first home - a studio flat in Ealing, west London - in September this year.
"I had no deposit and the property cost £152,500," she says. "At the time, my salary would not have allowed me to borrow that much."
Mortgage broker London & Country recommended she take out the Scottish Widows graduate mortgage, which comes with a guarantor facility.
"I never knew this type of mortgage existed. It allowed me to borrow 100 per cent of the value of the property, but it also meant my mum could act as a guarantor for the £40,000 shortfall between what I could afford and how much it cost."
Her mother, Kate, is in full-time employment and was comfortable with the arrangement, she adds.
"Ultimately it hasn't cost her a penny: I'm meeting the full repayments of £660 a month on an interest-only basis.
"When I come to the end of my two-year fixed-rate deal, I [will be able to] afford to borrow the full amount by myself, as well as switching to a repayment deal."
To protect her mother's financial commitment, Helly has also named her as a beneficiary on her life insurance policy, which she receives through her employer.
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
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