If you want to help your son or daughter buy a home, is a family mortgage that links some of your savings with their mortgage the answer? Or is a mortgage that uses some equity in your property a better option? Shared mortgage with parents and family guarantee mortgages explained.
Shared or family mortgages
If your son or daughter can’t save much by way of a deposit for a property, and you have savings that you don’t need, but don’t want to or can’t afford to give away, a family mortgage may be an option. It may also be suitable if you have a low mortgage or have paid off your mortgage entirely. There are different types of family mortgages.
Linked savings mortgages
These mortgages let one or more family members use some of their savings to help a first (or second) time buyer afford their home:
- The buyer saves a small deposit (not all mortgages require this, but most ask for the buyer to have a minimum deposit of 5%).
- Family members transfer some savings into a linked account. Normally it needs to be enough to enable the buyer to borrow no more than 75% of the property’s value, but these limits do vary.
- The borrower is responsible for making the mortgage payments. If he or she does this for a set period (typically three years or so), the family member can withdraw their savings.
- If the borrower can’t pay the mortgage, the family member’s savings could be used to cover these costs.
Linked saving mortgages: pros and cons
Family linked savings mortgages can be a good option for first time buyers who can’t save a large enough deposit, but there are potential pitfalls.
- The borrower can get a mortgage that they might otherwise not qualify for.
- The mortgage will be at a much lower rate than if you had a small deposit.
- The parent (saver) doesn’t have to give their savings away forever, and – as long as repayments have been made – will get them back at the end of the period.
- The parent may earn some interest on their savings.
- If you’re the person providing the savings, you’ll have to be prepared for them to be tied up for a period of several years.
- As the saver, you probably won’t get the best rate on your savings and you may not get any interest at all.
- The mortgage lender has the right to call on your savings if your son or daughter can’t pay the mortgage. Normally this will only happen if the property is repossessed and is sold for less than the mortgage is worth, but terms and conditions do vary.
A family guarantee mortgage explained
Here the parent/ family member uses some of the equity in their property by letting the mortgage lender take a charge on their home. A charge means the lender has a claim on a limited amount of the family member’s property. Normally the charge will be for 20% or 25% of the purchase price of their son or daughter’s property.
Family guarantee mortgage – what’s on offer
There are a number of different providers offering family mortgages. Some ask for savings from a family member to be linked to the mortgage, others allow the lender to put a charge on the family member’s home, for a limited amount (typically 20 – 25% of the purchase price of the buyer’s property).
This mortgage is aimed at both first and second time buyers. The buyer doesn’t need any deposit at all, but the borrower’s parent (or grandparent) can use some of the value of their property to ‘guarantee’ part of the mortgage.
SAVVY TIP: Confusingly, this isn’t the same as a ‘guarantor’ mortgage, where the person guaranteeing the loan could be liable for the whole lot if the borrower can’t or won’t pay. Instead here some of the equity in the parent’s house is used to guarantee a percentage of the mortgage, with Aldermore Bank taking out a charge against the parent’s home.
You don’t need to have any deposit at all if your parents/family are able to provide a deposit of 10%. The mortgage is on a fixed rate basis for three years and then switches to a lifetime tracker.
SAVVY TIP: Your parent doesn’t act as a guarantor (where they become liable for the mortgage in full). However, if the property had to be sold and it sold for less than the mortgage amount, the bank could use the savings to repay the shortfall.
This mortgage enables the borrower to team up with other family members and take out a joint mortgage, taking their income into account. However, the parent (or other family member) doesn’t become a co-owner of the property, which means there’s no potential capital gains tax bill. Once you can show you can afford the mortgage on your own, you can remortgage in your name only.
SAVVY TIP: This mortgage is only available in England and Wales. Anyone whose name is on the mortgage is liable for the whole payment, so that could mean a parent is liable for the entire mortgage if their son or daughter couldn’t or wouldn’t pay. Their credit files also become linked so if the son or daughter has a bad credit record, that would affect their parent. Also, if Barclays toughened up its affordability criteria, or if the son or daughter’s financial situation took a turn for the worse, it could mean that the parent/family member would have to stay on the mortgage for far longer than they’d planned.
This is aimed at first and second time buyers and there’s a 100% loan-to-value version and a 95% loan-to-value version. The criteria for the 100% version are tougher than that for the 95% version (it includes a minimum income requirement, for instance). The mortgage works by allowing the building society to take a charge against the parent’s house of up to 25% of its value.
SAVVY TIP: The building society will only consider properties up to 30 miles from your place of work for the 100% mortgage. For both mortgages won’t consider lending on ex local authority properties, flats over commercial premises or flats in blocks over five storeys.
This building society has a family mortgage which has a number of ways that family members can help. Firstly, they can deposit some savings into a ‘security account’. This works in a similar way to Barclays Springboard mortgage. Secondly, family members can use some of the equity in their property as security. This works in a similar way to the savings account described above. A family member can also put some savings into an offset account that’s linked to the mortgage. By doing this, the amount of the mortgage on which interest is charged is reduced.
SAVVY TIP: The borrower would need to be able to have a deposit of at least 5%. Family Building Society is part of National Counties Building Society. The Family Building Society says it will pay the borrower’s mortgage for up to six months if they lose their job in the first ten years of having their mortgage.
Vernon Building Society has a Family Assist Mortgage
Here, you can borrow up to 100% of the property’s purchase price as long as a parent or family member can deposit savings of up to 20% of the price in a savings account with the society. This money must be left in the account for four years and will be released if all payments are up to date after that time.
SAVVY TIP: Bear in mind that you won’t receive any interest on the savings you put into the account at the outset. You can’t add to this amount, but you can open a second, linked account, and this will reduce the interest paid by the borrower, even more.
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