Clydesdale and Yorkshire Bank’s recent First Time Buyers Research report found that 63% of people looking to get on the property ladder are supported by their parents in some shape or form. So apart from a straight out cash gift, what are the other, more creative ways for buyers to get help on the housing ladder…
If your helper has some cash to spare
Formal loan with conditions Loans can be given with conditions attached, such as interest to pay and time of repayment, if you have a solicitor oversee proceedings and draw up a formal loan agreement.
Offset mortgages Consider this option if you have a small deposit. Your parents are able to top up your deposit by adding cash in a dedicated offset account. This money reduces the Loan To Value ratio on the mortgage, so you can access a better interest rate product. An advantage of this type of mortgage is that your family can access their funds whenever they need to. The drawback is that they won’t be earning any interest on those funds in the offset account, and if they do withdraw some, the interest rate on the mortgage will increase.
Helper mortgages These are also helpful for buyers with a small deposit who want to try and access a lower interest rate mortgage. Your parents place their money into a dedicated savings account with the mortgage lender, which acts as security for the mortgage. The helper funds do not change the Loan To Value ratio, but they act as a backup in case you stop making mortgage repayments, or go into negative equity. Unlike an offset mortgage, the helper does get to receive some interest on the loan, BUT, they cannot access the funds for at least a couple of years whilst they are in the dedicated savings account.
If your helper has a property asset
Equity release schemes If your parents own their home outright with no mortgage, they can release some of its value through an equity release scheme. In a nutshell, equity release allows someone to borrow money against the value of their home, but this loan (or the interest) doesn’t need to be paid back until their death, or if/when they go into care. With this type of scheme, it is absolutely essential to take independent financial advice before diving in, as they can be reasonably complicated, have fees involved and are not particularly flexible if circumstances change.
Guarantor mortgages These are useful for people who have a very small deposit and want to borrow an amount that is greater than a bank would normally lend (but it won’t get you a lower interest rate). In order to grant the extra borrowing, the bank places a charge over some, or all, of the value of your parents property. This does mean that if you stop making repayments on the mortgage your parents would have responsibility for them and ultimately, their home could be on the line.
And what if your helper has no extra cash or a property asset
Joint mortgages A joint mortgage allows your parents’ income to count towards the affordability multiplier when a lender is working out much they are prepared to give you. So they are good if you have a decent deposit, but are self employed or have a small salary, and want to try and get a bigger loan. It does mean that if you are unable to make the mortgage payments then your parents would be liable for them.
Before signing up to any of these options, it’s particularly important to get advice from a specialist advisor, as some of these products can be complicated.
This is a guest blog from Amie Gramlick, the founder of HowToHomeBuy.co.uk - providing free independent advice for those going through the home buying process, particularly first time buyers.
Image courtesy of Gayung Bersambut