Can the new Family Mortgages help first time buyers?
With it becoming harder for 25-34 year-olds to save for a deposit, many mortgage lenders are starting to take notice and offer them some interesting niche products...
Can the new Family Mortgages help first time buyers?
In the 1980s the average UK house price was about £39,500. In 2019 it now stands closer to £235,000.
Even after taking inflation into account, this is a dramatic rise over the past 40 years. This upward trend could also continue, with many estate agencies predicting a further potential rise of 15.3% over the next 5 years.
Whilst house prices have skyrocketed, however, the same cannot be said for average UK wages. The Office for National Statistics estimates that whilst real wage growth averaged 1.2 - 2.9% between 1980-2009, since 2010 it has fallen to 2.2%. Deposits for first-time buyers have been growing for some time, but younger people are often struggling to raise the capital they need to get onto the housing ladder. As a result, about 40% of young people in the UK now claim to be unable to afford even a 10% deposit on the cheapest properties in their area, leading to them becoming known as “Generation Rent.”
With it becoming harder for 25-34 year-olds to save for a deposit, many mortgage lenders are starting to take notice and offer them some interesting niche products. One highly-publicised product is the Family Mortgage (sometimes also called a “family boost mortgage” or “guarantor mortgage”). The basic idea here is to try and reduce or eliminate prohibitively high deposit costs for first-time buyers, whilst keeping their mortgage payments affordable.
It’s a clever idea and one which we’re increasingly asked about here at Punter Southall Aspire. In this short article, we want to offer you an overview of how family mortgages tend to work, how they compare to other options and some of their key implications to discuss with your financial adviser.
We hope you find this content helpful and invite you to get in touch to find out more.
Family Mortgages: Overview & Comparison
Banks and other lenders have tried to offer zero-deposit schemes to first-time buyers before.
The 100% mortgage, for instance, allowed you to borrow up to 100% of the property value without needing to put a deposit down. The main problem this posed to borrowers was that it often led to crippling monthly mortgage payments. For the lender, 100% mortgages can pose a higher default risk because there is nothing put down as a security.
This is a big reason why 100% mortgages started to vanish from the market in the wake of the 2007 financial crash (although by 2015 they were starting to come back, albeit in a different form). For the guarantor there is also the possibility of negative equity, and the risk that poses of the lender repossessing the property.
Family mortgages work slightly differently, with the precise details varying across different products and lenders. An illustration is likely to help show how these work. Imagine 25 year-old Rebecca wants to buy her first home (valued at the average UK price of £235,000), but only has a 5% deposit saved up.
Assuming she could find a lender willing to offer her a mortgage on this basis, it would likely mean a high interest rate for her. With a family mortgage, however, her parents, siblings or other family members could help her get her first home, without facing large monthly mortgage payments for the foreseeable future.
One way this tends to work involves Mum and Dad putting some of their savings into a special account with their child’s lender. With one of the main offerings currently available on the market, for instance, they would put 10% of the property price into a savings account, which is locked away for 3 years and acts as security on the mortgage. Once the 3 years are up, her parents have the option of withdrawing the money (with interest earned).
Pros & Cons of Family Mortgages
For parents reading this, you might be asking: “Why would I lock away 10% of the property value into a special bank account, when I could just give this 10% to my child to help them onto the property ladder?”
This is a great question, and those offering family mortgages would likely reply that the main benefit is that you eventually get your money back - with interest. If you simply give these thousands of pounds to your child to help their deposit, then you are likely to never see it again.
This has important implications for financial planning, particularly when it comes to dealing with inheritance tax. For instance, it might make sense to go for the option which gives you your money back after 3 years. However, if this money would simply be added back into the value of your estate, then it might face inheritance tax (IHT). In that case, your child (as a beneficiary) might eventually receive the money anyway, minus up to 40%.
However, for parents with many years of work ahead of them and who are looking to build their estate, a family mortgage might make much more sense. Consult your financial adviser, if you are at all uncertain about this.
The really important area of financial planning to highlight is the security aspect of family mortgages. Some lenders will allow Mum and Dad to use some of the value of their own home as a security for their child, which can be an attractive option where no/little cash savings are available. Think very carefully before committing to this. Remember, if your property is acting as a security, then this could be at risk if your child misses their mortgage payments or defaults on their mortgage.