Despite house prices remaining largely stagnant in our local area over the last few years it’s still not easy for people to get on the housing ladder, as Matthew Grayson of Redcar financial firm Bob Little & Co explains…
House prices remain high relative to wages and with first time buyers often choosing to rent before looking to purchase it can make saving for a deposit difficult.
Combine this with stricter mortgage lending guidelines and the end of 100% loan-to-value mortgage and it’s often down to the “Bank of Mum and Dad” to help out where they can. In fact this year parents in the UK are expected to give their children enough house deposit money to collectively make them a top ten mortgage lender.
I am regularly approached by parents who would like to help their children with a house purchase. Below are some questions I’m often asked as well as a bit of guidance around each point.
1. Can I act as a Guarantor on my child’s mortgage?
Guarantor mortgages are potentially possible but they are not as easy to obtain as they once were. These mortgages tend to be geared towards professional applicants such as newly qualified doctors or solicitors. The idea is although the applicant’s income may not be enough to obtain the required mortgage right now they have a defined career path and their income is likely to improve in the not-so-distant future.
2. What’s a “Springboard” mortgage?
A Springboard mortgage is where a parent places 10% of the purchase price in an account with a lender and this acts as security for the first few years of the mortgage. With these type of mortgages the buyer’s wage will need to cover the full mortgage payment. These products were previously available if the buyer (the child) was able to add a 5% deposit on top of their parents’ contribution but now they are available from selected lenders with no deposit from the buyer at all.
3. Can I purchase a property for my child to rent back from me?
This is called a “Regulated Buy-to-Let”. While this is potentially available it is not to be confused with an “Unregulated Buy-to-Let” (where a property is purchased with the intention of a non-family-member living in the property as a tenant). A family member living in the property presents additional risks to the mortgage lender, so lenders often impose more stringent affordability checks compared with a normal (“unregulated”) Buy-to-Let. Also note that the government has recently introduced a new additional 3% stamp duty surcharge on second properties, so home owners who buy a second property for their child to live in will be liable to pay this additional stamp duty charge.
4. What about purchasing a property for my child to live in rent-free?
This is similar to a regulated Buy-to-Let. In some circumstances it’s possible to purchase a property which you (as the parent) retain ownership of but in mortgage terms this is classed as a second home or a purchase for family member. With this sort of lending your income needs to be able to support the total borrowing and you often need to put down a sizeable deposit.
Again, please note the government have recently introduced a new additional 3% stamp duty surcharge on second properties, so home owners who buy a second property for their child to live in will be liable to pay this additional stamp duty charge.
5. Can I gift my children a house deposit?
Most lenders will allow this. They usually only require a letter from you confirming you do not expect to get this money back from your child in the future.
6. Can I loan my children the deposit money?
This is more difficult because most lenders require no restrictions to be attached to the deposit. However, in some instances a lender may allow the parents to loan (rather than gift) a deposit.
7. My son or daughter is purchasing a property with their partner and I’m concerned if they split up my deposit will be lost
While this is more of a legal issue than a mortgage issue it is common for parents who give money to their children for a deposit to seek legal advice first. Many solicitors advise putting a “legal charge” on the property. This means in the event the owners break up and the property is sold the mortgage lender will receive their cut of the money first, then the parent with the legal charge will receive their money second and finally the remaining sale proceeds (if any) are split between the property owners (your child and their partner). This assumes there are sufficient sale proceeds to be divided after the mortgage has been repaid but this may not happen in practice – especially if the mortgage amount is high relative to the property value or the property value falls before it is sold. If you seek advice about a legal charge from a solicitor there are likely to be fees to pay but it can be very valuable and it can give you added peace of mind.
• Matthew Grayson is a mortgage adviser at Bob Little & Co Ltd, a Chartered firm of independent financial advisers based in Redcar who have been providing quality financial advice to individuals and businesses for 30 years. The firm offers advice on savings and investments, retirement planning, life assurance, critical illness cover, mortgages, auto enrolment, business protection and personal tax planning.