Keeping it in the family - Mortgages - Money - The Independent

Keeping it in the family

First-time buying is getting increasingly difficult but Stephen Pritchard says there are ways your relatives can help

The average house in the UK now costs £154,000. As a result, first-time buyers are significantly older than they were 10 or 15 years ago. According to the Council of Mortgage Lenders, three quarters of people under 25 want to own a home in 10 years' time. Only 37 per cent want to own a home now. Rising property costs present would-be first time buyers with two choices: wait until they can save a significant deposit and their incomes rise sufficiently to support a large mortgage, or look for a more radical way to get on the property ladder.

The average house in the UK now costs £154,000. As a result, first-time buyers are significantly older than they were 10 or 15 years ago. According to the Council of Mortgage Lenders, three quarters of people under 25 want to own a home in 10 years' time. Only 37 per cent want to own a home now. Rising property costs present would-be first time buyers with two choices: wait until they can save a significant deposit and their incomes rise sufficiently to support a large mortgage, or look for a more radical way to get on the property ladder.

Buying a property jointly with parents or enlisting the support of relatives as a guarantor are two ways that can help first-time buyers bridge the financial gap. A joint mortgage with a close relative will increase the budget for buying, provided the supporting relative has a higher income. Banks and building societies calculate the amount they will lend on a "salary multiple". This is typically three or three-and-a-half times a single applicant's salary, or two-and-a-half times two buyers' joint salaries.

Arranging a joint mortgage with someone who is not going to be living in the property, however, can be rather more difficult than for a couple or even two friends living together. Not all lenders will be supportive of mortgage applications involving a parent or other relative, so the services of a mortgage broker might be necessary to track down a source of funds.

According to Paul Fincham, spokesman for the Halifax, there is not a specific set of rules governing joint mortgage applications, where one borrower is a relative not planning to live in the house. Instead, the amount the bank will lend is based on a combination of standard lending multiples, and affordability.

The Halifax, along with most other lenders, calculates affordability by taking a borrower's income as a starting point, and deducting expenses such as living costs and, most critically, other debts.

Borrowing with a parent who has already paid off his or her mortgage should pose relatively few problems. But if the parent has debts or a poor credit score it will make it much harder to find a deal. If the parent taking out the mortgage has a high enough income to support their own and their sibling's mortgage repayments, it should be possible to find a lender. But if the parent's income is low, would-be buyers might struggle.

Fincham points out that in the case of a joint mortgage application, the lender will want to see a detailed breakdown of income and expenditure for everyone who will be on the mortgage, and they also recommend that all parties to the mortgage take their own, separate legal advice. This is important, as everyone on the mortgage deeds is "jointly and severally" liable for the debt. If one buyer falls behind with payments, the other has to meet the shortfall. The good news is that if applicants meet all the criteria, they can choose from the bank's full range of mortgage deals.

As an alternative to buying a home as joint purchasers is for first-time buyers to ask a parent or other relative to act as a guarantor of the mortgage. A guarantor is not an owner of the property, so in some respects the process is a little more straightforward than joint ownership.

There would, for example, be no tax implications when it came to selling the property. With joint ownership, the non-resident buying partner could face a capital gains tax bill, as the property would not be their main residence.

Even so, lenders caution that acting as a guarantor is not something to be taken lightly. The guarantor is responsible for the full mortgage repayments, should the buyer default. For this reason, any lender will want to ensure that the repayments are affordable both to the borrower and to the guarantor. Nor will having a guarantor necessarily increase the size of the mortgage a first-time buyer can raise as the guarantor will not contribute towards the repayments.

Where a guarantor is useful is where the main borrower lacks the financial track record to arrange a loan, either because of never having borrowed before or because of being in a new job.

Banks and building societies may be more flexible towards borrowers with a proven career path: professionals such as lawyers, doctors or architects whose incomes grow according to a predictable pattern when they qualify and a guarantor or joint buyer may help them bridge the gap to a better property. But even then, lenders will want a guarantor to be a close family member. For a lender to agree to a guarantor mortgage, they want to see evidence of financial mentoring, not just the legal paperwork.

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