The route to homeownership is filled with challenges and securing a mortgage is becoming increasingly difficult for aspiring first-time buyers. As a parent, you may want to provide support and there are several different options to consider. Paul Grennan, Principal Mortgage & Equity Release Adviser at Pembroke Financial Services, explains some of the options.
Paul said: “House prices have been growing at a pace that outstrips wage growth. According to the Halifax House Price Index, in April 2021, the average house price was £258,204. This followed an 8.2% increase in just a year. While this is good news if you’re hoping to sell your home, the huge increases present two challenges for those hoping to get on the housing ladder; saving a deposit and proving affordability.”
- Saving a deposit. In most cases, a first-time buyer will need a 5 – 10% deposit. As house prices rise, so does the amount needed to act as a deposit. Saving this sum is the first challenge many first-time buyers run into. Separate Halifax research found the average first-time buyer now puts down £58,986 as a deposit.
- Proving affordability. Even with a sizeable deposit, first-time buyers can struggle to secure the mortgage they need to purchase a home, especially if they’re living in expensive areas. The affordability checks banks carry out have become more stringent and some aspiring homeowners can struggle to find a property that matches their needs and is within budget.
As a parent, you may want to offer a helping hand if your child is ready to buy their first home, and there’s more than one way you can do it.
1. Provide a lump sum to use as a deposit
Paul commented: “Around half of all house purchases among the under-35s now rely on a financial helping hand from parents, according to Legal and General research. Without a financial gift from parents, first-time buyers estimated their homebuying plans would have been delayed by four years.
“On average, parents are handing over £19,000. In 2020 alone, it’s estimated that parents contributed £1.36 billion to support housing purchases. If you’re able to do so, providing a lump sum, either as a gift or loan, can help your child reach homeownership goals sooner.”
2. Use your savings for an offset mortgage
An offset mortgage links a mortgage to a savings account. Depending on the type of account selected, your savings can act as a deposit or reduce the cost of borrowing for your child while remaining in your control and earning interest. In some cases, your savings will be inaccessible for a set time.
There are now offset mortgages designed for children and parents, sometimes known as a “family mortgage”. Some of these allow your savings to act as a deposit, meaning your child can take out a 100% mortgage. However, if your child defaulted on payments, your savings could be used.
3. Act as a guarantor for a mortgage
“If your child is struggling to secure a traditional mortgage, a guarantor mortgage may be appropriate. This is where a guarantor takes on some of the risks of the mortgage. This will usually mean your own home or savings are used as security against the loan. If your child misses mortgage repayments, your savings or home could be at risk,” Paul continued.
A guarantor mortgage can mean your child can put down a lower deposit, borrow more, or secure a mortgage if they have a poor credit rating.
4. Take out a joint mortgage with them
By being on the mortgage, banks may consider your income when conducting an affordability check. So, your child may be able to borrow more to purchase a home. However, keep in mind that you will be responsible for repayments and it could affect your ability to secure other forms of borrowing.
If you already own a home, you could also be liable for Stamp Duty. A joint borrower, sole proprietor mortgage arrangement can provide a solution to this.
The importance of taking advice before lending a helping hand
Paul concluded: “While it’s natural to want to lend a helping hand to your child when they’re preparing to buy a home, it’s important to take advice first.
“Whichever option you’re considering, financial advice can help you understand the short-, medium-, and long-term consequences. Would providing a gift to act as a deposit mean you risk running out of money in your later years? Or would using an offset mortgage that locks away savings mean you can’t reach short-term goals? In many cases, parents are in a position to offer support but seeking advice first means you can do so with complete confidence.
“In some cases, taking professional legal advice is also advisable. For instance, if you’re providing a deposit in the form of a loan, legal advice can make sure you’re all on the same page and protect your finances.
“Finally, a mortgage broker can help you and your child find the right mortgage deal and offer advice on the different options, whether a traditional mortgage is suitable or a guarantor mortgage makes sense.”
If you have any questions about helping your child on to the property ladder, please call us.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.