7 ways parents can help with a mortgage
If you want to get on the property ladder, there’s a good chance that you’re going to have to charm the Bank of Mum and Dad.
The average cost of a home bought by a first-time buyer has increased by 47% in ten years from £154,0003 to £227,000, while the average income grew by just 18% over the same period. (1)
Gifting a deposit
Gifting a deposit is a really common way for family or a friend to support you. And contributions aren’t getting any smaller.
The average contribution of families and friends increased by more than £6,000 this year to £24,100. In London it’s even higher - £31,000 on average. (2)
Your lender would need a ‘gift letter’ from your relative or friend, which is a document confirming that it’s a genuine gift and they won’t have a legal interest in your home.
Loaning a deposit
Another way for a family member to help out is to lend you the deposit.
While this is a perfectly valid way of helping you get on the housing ladder, it’s really important that everyone understands what you owe and when you’ll pay it back. That way there’ll be no surprises down the line.
If your deposit is a loan, rather than a gift, it could affect how much you can borrow, depending on the lender’s requirements.
With a guarantor mortgage, your parent or family member has to pay back the loan if you can’t.
The lender will expect your guarantor to own their own home outright or have enough equity in it for their requirements. For example, they may need them to already own at least 30% of their home.
Your guarantor will also need to have a high enough income to help cover your repayments if needed, while still being able to keep up with their own mortgage repayments and spending.
And, of course, they’ll have to have a good credit score so the lender’s satisfied they’re financially stable.
Offset mortgages work by linking your mortgage to a savings account held by a family member. The more money in their savings account, the less your mortgage will cost.
An offset mortgage can sometimes mean locking money away for a long time, so some lenders will have a minimum savings deposit requirement.
The rise of mortgages linked to a relative’s or friend’s savings account has led to the return of 100% mortgages, where you don’t need a deposit at all. Lenders like Lloyds, Barclays, and Tipton & Coseley Building Society offer them.
Barclays Family Springboard Mortgage, for example, allows you to borrow the full purchase price of your home while your relative or friend gives 10% as security for five years.
If all goes well, your helper gets their deposit back plus interest once the five years is up, and the mortgage continues. (3)
Joint borrower sole proprietor
With a joint borrower sole proprietor mortgage a family member contributes to your mortgage payments but doesn’t jointly own the home.
This is becoming more attractive now that you need to be a first-time buyer in order to qualify for stamp duty relief on the first £300,000 of the purchase price. (It’s unlikely that your parent or relative will also be a first-time buyer.)
Parental/family concessionary purchase mortgages
These mortgages work by allowing a family member to sell you their property below the market value.
Bear in mind that many lenders can be particularly cautious about offering these mortgages. They’ll want certain assurances, for example that you’ll be living in the home as your main residence.
What’s right for you
As we’ve seen, there are lots of options if you’re planning to use the Bank of Mum and Dad to help you get on the property ladder.
In fact, products where a parent or relative offers a guarantee to help you get a mortgage have grown significantly and they now offer some of the most competitive interest rates. (4)
“There are quite a few options to consider if you’re lucky enough to have a family member or a friend willing to support you,” said Haris Sehic, a Mortgage Adviser at Trussle.
“It can be tricky working out which solution is best for both parties, so get some free advice from a mortgage broker.”
(2) Legal & General