There a a host of market factors at play working against first-time house buyers: rising property prices are making affordability a growing issue, a lack of mortgages for those without huge deposits, and high rental costs make it hard to save. No wonder that first-time buyers these days are increasingly reliant on help from the Bank of Mum and Dad (BoMaD)
Recenet research by Legal & General found parents helped more than half of FTBs under 35 to get a toe on the property ladder last year. Seven in 10 buyers said they would otherwise have had to delay their plans to purchase by an average four years.
BoMaD loans to under-35s averaged £19,000, and a fifth said they received more than £30,000. Only 30% of respondents said they expected to repay at least some of it. But alarmingly, separate Legal & General research has found that 17% of over-55s were enduring a lower standard of living after helping their children buy a house.
So what are the various options for parents to consider when lending a hand, including those that don’t actually involve forking out hefty cash lump sums?
Help with a Deposit
Helping with the deposit is the most common arrangement for parents lending a hand with a first-time property purchase. Mark Harris, chief executive of mortgage broker SPF Private Clients, says: “A traditional route is for parents to gift money to the child to assist in the purchase. With this being used for the deposit, the borrower can hopefully drive down the loan to value (LTV) and so access a more competitive mortgage rate.”
However, he warns that lenders may look to confirm that the parents do not regard this money as a loan, or else it could be included as a financial commitment when they are assessing affordability.
One piece of good news from the spring Budget, however, is that under a new version of the Help to Buy scheme, from April the Government will guarantee 95% mortgages from some of the biggest lenders including Barclays, HSBC, Lloyds and Santander. This should make it easier for borrowers with smaller deposits to find a deal.
Use a Savings Scheme
But a helping hand with a deposit does not solve the underlying problem of affordability. In many parts of the country, household incomes (on which mortgage lenders calculate how much they'll lend) remain well out of line with rising property prices. The average stood at just over £250,000 in December, according to the latest figures from the Office for National Statistics.
Many parents anyway may not have much cash readily available for a deposit, whether it’s tied up in investments or as equity in their own home. Or they may feel uneasy about gifting money outright, perhaps because they can’t afford to do the same for each of their several children.
But the mortgage industry has been creative in enabling parents to back their children’s purchases in other ways.
One recent growth area has been in savings-backed schemes, Harris says. “Savings-backed options, such as the Barclays Family Springboard or the Lloyds Lend a Hand scheme, are increasingly popular."
Through these, parents deposit a sum of money into a savings account with a lender who takes a charge over it. These savings, typically between 5% and 25% of the property price, are held as security should the borrower not make the payments. The parents get their money back after a few years.
Harris adds that there are also equity-backed schemes such as the Family Deposit Scheme from Loughborough BS, which offers up to 100% of the value of the property (subject to a maximum of £300,000), as long as a family member guarantees the deposit of up to 20% of the purchase price by way of cash or a collateral charge against their property, or a combination of the two.
A third option, the Family Mortgage from the Family Building Society, is a kind of hybrid, where parents can help with a small deposit (5%) and then either use their savings or have a charge on their property as guarantee.
Get a Joint Mortgage
A different approach involves using a joint mortgage to share ownership of the property and responsibility for the mortgage with the child. The big problem here, however, is that if you are already a homeowner, you’ll pay the 3% second home stamp duty surcharge on the purchase.
One way to sidestep this and other potential problems is through a relatively new mortgage type known as "joint borrower sole proprietor".
If the borrower has a deposit but affordability (property price relative to income) is the issue, then parents can apply jointly with the child so their income is taken into account when deciding how big the mortgage will be. Crucially, although the parents are jointly responsible for the mortgage, their names don’t go on the property deeds so they don’t incur the 3% stamp duty surcharge.
It’s also possible to set up what’s known as a family offset mortgage, whereby parental or other family members’ savings are linked to the child’s mortgage, reducing the amount of interest payable each month. Again, the Family Building Society is among the providers offering these.
Whatever best suits your circumstances, if you plan to embark on a formal arrangement with your child, make sure you all understand the financial and legal implications and have a clear agreement setting out details.
“There may be issues around acceptable incomes, equity requirements, applicant ages, how long the support is required to last, what happens if things go wrong and so on,” warns Harris. "Professional financial and legal advice is very important".
