How to help your children get a foot on the property ladder
House price growth continues across the UK: the latest figures from the Halifax show that prices over the three months to May were up 8.7 per cent, compared with the same period in 2013.
There are signs that price rises may ease off somewhat in coming months, on the back of recently introduced stricter mortgage lending conditions (the Mortgage Market Review or MMR) and talk of interest rates rising sooner rather than later - but the fact remains that would-be first-time homebuyers are up against an increasingly tough challenge in their efforts to get a toe on the ladder.
Unsurprisingly, parents play a critical role in the process. Research into the changing profile of first-time buyers published by HSBC in February found that two thirds have some form of financial help from their parents.
The HSBC study also highlighted how difficult the environment has become for first-timers. It found the average value of first purchases is £147,000 - but first-time buyers now have to find an average 20 per cent deposit, worth almost £36,000. That amounts to a whopping 82 per cent of their average annual income.
To put these figures into context, their parents' generation bought their first home around 30 years ago with a deposit averaging just over £1,000, worth just 12 per cent of their average yearly income. Even as recently as 2007, first-time buyer deposits equated to only 35 per cent of income.
Times have certainly changed. Although over recent months some assistance - particularly for those outside London and the South East - has come from the government's Help to Buy scheme, boosting the availability of 95 per cent loan-to-value (LTV) deals, first-time buyers clearly need all the help they can get - and parents or grandparents are an obvious starting point.
There are various options potentially open to them, including a number of bespoke products designed for buyers in conjunction with family members - though in practice, as David Hollingworth, associate director at broker London and Country Mortgages, observes: 'The situation usually dictates the route taken.'
Unsurprisingly, given the size of deposit now required, the most common parental support takes the form of help with that initial lump sum. This may mean providing the minimum down-payment needed, or supplementing the child's savings further so as to enable them to qualify for a lower interest rate, says Hollingworth.
'Although the higher LTV first-time buyer deals available have definitely improved in terms of both numbers and the interest rates on offer, people get a better rate when they have a bigger deposit,' he adds.
gift, rather than loan
Adrian Anderson, director at broker Anderson Harris, recommends a gift rather than a loan if possible. 'A gifted deposit sits better with a lender than a loan; the latter affects how much the applicant can borrow because the repayments will be factored into their affordability,' he comments.
Parents who don't have spare savings to give away could consider remortgaging their own house with their existing lender or another provider, to release equity for a deposit. However, warns Mark Harris, chief executive of broker SPF Private Clients: 'The downside is that many lenders are not keen to lend beyond retirement age, so [older] parents may find it hard to get a mortgage agreed.'
But particularly in the South East and London, where prices are much higher than elsewhere in the UK, first-time buyers often struggle with the affordability of the mortgage debt itself. Figures from the Council of Mortgage Lenders for the first quarter of 2014 show that the average first-time buyer borrows 3.83 times their gross income (up from 3.6 times over the same period in 2013), compared with the UK average of 3.42 times.
Here, too, parents may be able to help.
Joint mortgages, where parents add their names to the title deeds and mortgage documents and share ownership of the property, have gained popularity over recent years. Here, the parental income (taking into account existing mortgages and other debts) becomes part of the equation, boosting the potential loan value. The term of the mortgage will be dependent on the parent's age, however.
Because this arrangement involves second home ownership for the parent, there is also a potential capital gains tax (CGT) issue to consider; but it can be reduced if parent and child hold the property as 'tenants in common' (each owning an apportioned percentage of the whole, which could be very small for the parent), rather than as 'joint tenants' who both own the whole property.
Anderson says it is also possible to find lenders who will allow the parent to be on the mortgage but not on the property deeds, doing away with the issue of CGT liability on the sale of the property. Woolwich is one such. However, this means the child could potentially sell up without the parent's consent; in effect, the parent is left with liability but no control, so it's a risky option.
act as a guarantor
Another alternative is the guarantor mortgage, where the parent shoulders responsibility for the loan in the event that the child can't meet repayments. Again, the mortgage lender takes into account the guarantor's income, debts and/or assets, as well as the child's income, in assessing how big a loan to approve.
However, as with joint mortgages, lenders may be reluctant to take on guarantors close to retirement - as many parents are - because their income is likely to drop significantly. '[If they do agree such a loan] lenders want a realistic likelihood that the child will be able to afford the repayments in their own right, without the need for a guarantor, within a few years,' explains Hollingworth. He suggests these mortgages are more likely to be offered to trainee professionals whose salaries are set to rise significantly.
'In fact there are fewer guarantor mortgages available these days, probably because MMR and system changes have made it harder for lenders to demonstrate a mortgage is affordable for a guaranteed customer,' says Hollingworth.
RBS and Newcastle Building Society are the most recent providers to pull out of the market; but Virgin Money still offers a guarantor product based on the parent's income and Market Harborough's Family Pledge mortgage is another option.
Some providers will accept a charge against the equity in the parent's house as guarantee on the child's loan. Harris gives the example of Aldermore Mortgages' Family Guarantee mortgage, available via brokers. 'No deposit is required, but a parent or grandparent must guarantee the value of the mortgage above 75 per cent LTV in the form of a charge on their property,' he says. Bath BS offers a similar product.
Harris warns, however, that parents who act as guarantors must be clear on what they are getting into, and suggests seeking legal advice if the lender is taking a charge over their property. 'Depending on the details of the guarantee, you may be restricted from borrowing in your own right, and you could lose your home if your child defaults on the mortgage, so it's important you understand what you are signing up to,' he says.
first-time buyer mortgages
Some of the most innovative first-time buyer mortgages - among them the Woolwich Family Springboard and Market Harborough Building Society's Family Deposit mortgages - are designed to help those who can only afford a small deposit, but who want to take advantage of the lower rates available to those with larger sums to put down upfront.
The idea here is that the child puts down a 5 per cent deposit, but then the parent puts a further 20 per cent deposit into a separate interest-earning account for a set period, typically five years, as collateral. On the back of it, the child is able to access a more competitive rate - for example, MHBS's Family Deposit mortgage offers a 1.5 per cent discount on 95 per cent rates for the mortgage term.
The beauty of this arrangement is that the 20 per cent is not a gift, nor is it tied into the property itself. 'As long as there's no problem with repayments, the parent gets their money back at the end of the five years,' observes David Hollingworth.
'It's a really good system if there are several kids in the family and not a huge amount of spare cash to help them, because it can be recycled. It's also good where the child is buying with a boyfriend or girlfriend and you don't want to gift the money to both of them in case they subsequently split up.'
Six tips for helping a child with a first property purchase
- Be absolutely clear whether your contribution is a gift, a loan with or without interest, or an investment from which you expect to take returns.
- See a solicitor and formalise your agreement.
- Don't over-stretch your own finances to help your child.
- Don't forget that mortgage rates are likely to rise in the not-too-distant future.
- If you have a stake in the property, ensure your child doesn't sell without your consent by completing Land Registry form RX1.
- Take professional advice to help you choose the right type of mortgage; remember some products are only available through a broker.