First-time buyers turn to 'bank of mum and dad' to get a mortgage

A government meeting this week offered no fresh help to borrowers. But there are solutions out there. Simon Read reports
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The Independent Online

Housing minister Grant Shapps chaired a mortgage industry summit on Tuesday. The subject? First-time buyers or, to be more specific, what lenders can do to help people climb on to the property ladder. Lenders are obviously worried about this because the fewer new borrowers there are, the less profits they can make. The government is keen to kick-start the market as it will, in turn, boost the economy.

Part of the perceived problem is people think lenders won't grant mortgages at the moment. It's true that the days of easy borrowing have disappeared, but there are a few decent deals appearing, especially for those who can raise a ten per cent deposit. That's relatively positive compared with a few months ago when it looked terribly bleak for anyone hoping to buy their first home. The best deals then were only being offered to those who could raise a 40 per cent deposit – far beyond the means of almost all first-time buyers.

This week's summit was the first step in creating better conditions for first-time buyers, according to Paul Broadhead, head of mortgage policy at the Building Societies Association. "Bringing industry and government bodies together in one room could be the start of a process which re-examines and re-evaluates the housing market," he said. But Michael Coogan, director general of the Council of Mortgage Lenders was less positive.

"Creative approaches have a role to play in helping to turn market stability into market recovery but no one will be surprised to learn that there is no simple quick-fix for a market which has changed fundamentally since the credit crunch," he warned. In other words, behind the meetings and positive messages from ministers and lenders, it isn't going get much easier for first-time buyers any time soon.

The difficulty in raising enough cash for a deposit – let alone securing a loan – has seen the number of young people turning to the bank of mum and dad more than double in the past five years. The number of first-time buyers under 30 who turned to parents or other relatives for financial support climbed from 38 per cent in 2005 to 84 per cent last year, according to CML figures. Of course, many people simply don't have the option, but for those who can turn to family for financial help, it can be the ideal solution.

Lenders have recognised that and have begun launching more parent-assisted mortgages. "For most first-time buyers it is impossible to get on the housing ladder without the help of mum and dad, whether it be with the deposit, acting as a guarantor or jointly purchasing the property," says Melanie Bien, director of independent mortgage broker Private Finance.

There are similar options such as buying with friends but doing so can lead to legal problems somewhere down the line if there's a falling out, she points out. "Clubbing together with friends or siblings to buy means a bigger contribution to the deposit and help with the monthly mortgage payments. But borrowers need to ensure they know what they are getting involved in and how they will get out of it; drawing up a legal contract at the outset stating what happens once someone wants to sell their stake will help."

Another option to consider is a new-build home as a number of developers are offering incentives and mortgages at higher loan-to-values than normally offered. Taylor Wimpey has teamed up with Melton Mowbray and Saffron Building Society, for instance, to offer a 95 per cent loan-to-value deal fixed at two years from 5.49 to 5.99 per cent. But keeping an eye on moving interest rates is important, says Bien. "While 5.49 per cent is not a bad rate for that level of borrowing, fixing for such a short time is risky in a volatile housing market in which interest rates look set to rise sooner rather than later."

Meanwhile, Bovis has a deal with Woolwich, where the lender will offer up to 90 per cent loan-to-value to first-time buyers buying a Bovis home. In return the developer provides an insurance scheme to cover the lender if the first-time buyer defaults on their mortgage payments and the property has to be sold for less than the outstanding mortgage.

Some developers have also spotted the potential of the bank of mum and dad. Hitachi Capital has linked up with Barratt to provide parents with loans of up to £50,000 to put towards their child's deposit on their first home. Meanwhile, Northstar Homes has tied up with Bath Building Society to offer what is essentially a buy-to-let mortgage for parents to help young people while they are at university.

Bath has offered a Buy For Uni mortgage since 2006. It is a 100 per cent mortgage designed to allow students to buy a property using their parents as guarantors. The new tie-up, with Northstar subsidiary Uni-Commodation, aims to ease the process by helping parents and students find a property and renovate it to the required standard. It can work well as Bath University student Jack Renders discovered (top right).

There are other guarantor mortgages around. For instance the Co-operative Bank will lend 4.5 times a borrower's income plus 1.5 times the guarantor's income. "However, you still need a 15 per cent deposit and that will still prove a stumbling block for many," points out Andrew Hagger of Moneynet.co.uk.

There is also Lloyds' Lend a Hand deal, where a first-time buyer needs only a five per cent deposit as long as their parents put the equivalent of 20 per cent of the property value in a savings account with the bank. The deal allows a borrower to access rates usually only available to those with a 25 per cent deposit. That's crucial as a 90 per cent loan can cost around two per cent more than most 75 per cent deals.

After three and a half years, if there is 10 per cent or more equity in the property then the parents are released from their obligation and can have their cash lump sum back. "I'm surprised that no other lenders have introduced something similar," says Hagger. "Overcoming the huge deposit requirement is still the major issue for first-time buyers."

'I got on to the property ladder at 18 with my parents' help'

Civil engineering student Jack Renders, 19, took out a mortgage last year for his three-bed maisonette in Bath through a Buy For Uni scheme.

"It was my parents who pointed out to me that I could be investing £20,000 during my time at uni rather than wasting it on renting.

"When we started looking at accommodation, they were keen for me to have a comfortable space to live and study in.

"I was 18 when I started looking for properties, and I discovered it was pretty much impossible to get a mortgage with most companies. The Buy For Uni option through Bath Building Society has allowed me to get on the housing ladder early, with my parents acting as guarantors for the loan.

"With the help of my parents I redecorated the property and converted the lounge into a bedroom for myself. I have rented out the two large upstairs rooms to other students, and this income helps me to pay the mortgage repayments comfortably each month.

"A lot of people are only just getting on to the ladder in their 30s, which means they will probably be close to retiring by the time they pay off their loan. I'm in a brilliant position now because instead of paying rent while I study, I'm paying money towards a mortgage, and my future.

"When I leave university I'll already have a mortgage in place and will be able to start paying off the balance straight away.

"My friends find it funny that they're paying me rent, some people are jealous because they can see the sense in it. I'm just thankful that I've got ahead of the game."

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