House prices hit an all-time high in August 2020, on the back of the government’s Stamp Duty holiday scheme. Many mortgage lenders are also asking for deposits of at least 20% in the wake of the Covid-19 pandemic. Here’s how parents, families and friends can help would-be first time buyers out with deposits, guarantor mortgages, and family offset mortgages.
With the average UK home now costing close to £250,000, and many lenders pulling their 90% mortgage deals, a typical first time buyer will need a deposit of around £50,000 to get a foot on the housing ladder.
Raising this kind of money can be challenging – if not impossible – for many young first time buyers, so a little helping hand from family can be invaluable. That's where guarantor mortgages come in.
A guarantor mortgage is a mortgage for someone who does not meet the lending criteria on their own, but who a lender is happy to make a loan to on condition that a third-party acts as a guarantor. If the borrower runs into problems, the lender can ask the guarantor to make up any shortfall in repayments.
The guarantor’s own home is at risk if the new borrower falls into arrears.
These loans normally appeal to borrowers who have small or no deposits, who are on a low income and/or who have a poor or non-existent credit record.
Lenders will still carry out affordability checks on the borrower and they shouldn’t agree to a mortgage if they think the borrower will struggle. But if the lender has a few doubts about the borrower’s long-term ability or simply doesn’t have quite enough information to be 100% confident about granting the loan, having a guarantor on board can be the clincher.
Although it is the named borrower who owns the property, the guarantor gives a legal guarantee that they will step in and make repayments if the borrower falls behind.
Usually, the guarantor’s own home is used as collateral, and can be repossessed in extreme cases. But sometimes the lender is happy to sit on a cash deposit from the guarantor that is paid back (usually with interest) once the borrower has made a set amount of repayments. If there is a default in the meantime, the lender can use the cash deposit to make up any shortfall.
If no repayments are missed, nothing will be required of the guarantor. It’s only if things go wrong that the lender will expect both the borrower and the guarantor to put things right.
Banks and building societies usually expect a guarantor to be a close member of the borrower’s family. Typically, guarantors are parents of the borrower.
All guarantors must be homeowners in their own right. Some lenders expect them to have paid off their own mortgages in full, although other lenders are less strict about this.
There’s no set amount a guarantor needs to earn. The lender will carry out a credit check on the guarantor and take their income into account, but usually the lending decision is taken based on the borrower’s and the guarantor’s combined means.
It’s the fact that the guarantor is putting up collateral (their own home or a cash lump sum) that is most important for the lender.
No, but the guarantor will remain linked to the mortgage until the lender has made a sizeable inroad into repayments. It’s usually based on a certain number of years or reaching a lower LTV on the loan – but if the borrower has repayment difficulties in the meantime, this period can be extended by the lender.
If parents, grandparents or the whole family are unable to help by buying a house outright (which is the most direct way to help, but isn't really on the table for most families), there are a number of ways families can help first time buyers.
If you can afford it, gifting some or all of the amount a first time buyer needs to put down as a deposit is perhaps the simplest way to help them on to the housing ladder. Just make sure you follow the correct procedure by reading our guide to gifted deposits.
However, if the would-be first time buyer has a low income or a poor credit score, simply having a deposit won't be enough to get a mortgage.
A family deposit mortgage can help boost a first timer buyer's deposit without a family member donating the money directly.
By depositing money into an account linked to the borrower's mortgage, a family member's savings can be offset against the mortgage, making repayments more manageable. Typically, though, the borrower will need a deposit of at least 5% of their own.
There are instances where the borrower won't need to put down any deposit, but this should be approached with caution.
Once a sufficient period of time has elapsed, or enough of the mortgage has been repaid, the family member will then get their money returned in full, and often with interest. The downside is that this could take many years.
If you're a parent thinking of helping your child buy their first home, there are a few steps you should consider before rushing in and offering financial help.
Obviously, the first thing to think about is your own financial situation. What are your resources? How much financial help can you give?
Then think how much help your child will need – are they in a position to own a home and maintain a mortgage? Talk to them candidly about their circumstances, if they'd like to own a home, and whether they want your help to buy one.
Maintaining a property requires commitment and financial security, it could be risky if they became caught in a situation of having to keep up mortgage repayments or other maintenance costs they can't afford.
It will save you a lot of potential stress and confusion if you are clear from the start about what you want to do to help your child and the terms of your financial help.
You should decide whether you are giving your help as a gift, an investment or a loan (and if you will charge interest), and make this clear to your child beforehand to avoid any confusion further down the line.
If you are named on the property's deeds you may have to pay tax related to the property, such as stamp duty or capital gains tax on any profit made from a sale.
If you are gifting money this may also be subject to inheritance tax if you die within seven years.
Depending on how you raise the money to gift, you may also have to pay capital gains tax as this could be interpreted as ‘disposing’ of assets.
You hope that no dispute will ever reach a point of having to get lawyers involved, but drafting up some formal agreements with a solicitor beforehand could be a good idea, especially if you're treating your help with the house as a loan or investment.
On another legal note, if you want to make sure the house cannot be sold without needing your permission, you can contact the Land Registry to have the property restricted for sale without your consent.
Whether you have bought the entire house outright, helped with a deposit or acted as a mortgage guarantor, you should remember this is not your home and you shouldn't really make any rules on how your children are going to live there.
You would be well within your rights to ask them to respect your wishes with the property, but obviously using financial help as emotional leverage is likely to lead tensions within any relationship.