Helping 1st Timers Onto The Housing Ladder
Friday, November 05, 2010 by Douglas And Gordon
Helping 1st Timers Onto The Housing Ladder - Can Parents Help Their Kids Without Just Signing A Blank Cheque?
Things are tough for First Time Buyers. While many have been counting down the days until they can finally buy a property of their own rather than living under their parents’ roof or paying someone else’s mortgage, the events of the past few years have conspired against them in a way that has left many wondering if they will ever be able to clamber on to that first rung.
High property prices were one thing, but Armageddon in the mortgage market is something else entirely. With lending criteria heavily fortified and loan-to-values decimated, many have been left cowering in the trenches. Of course if you believe some of the information written and reported, the housing and mortgage market is doomed for years anyway, so what is the use of worrying?
The situation, especially in London, is nowhere near that bad.
In recent years many new buyers have had to rely on parental assistance to get them on the housing ladder. While many parents have been fortunate enough to be able to assist, it does raise a whole series of questions, for example apart from simply buying a property for cash, what else can be done to help and, once done, is it a long-term commitment?
Well, whisper it carefully, but some lenders have actually been looking at ways to help.
Take the Guarantor Mortgage for instance. This has long been misunderstood as a concept and, until recently, was actually just another term for a joint mortgage. In other words, a parent acting as guarantor for their daughter would be treated in exactly the same way as if they were a couple buying together. The parental income would have to be sufficient to cover the new mortgage borrowing in total plus any existing mortgages they may have.
Whilst the mortgage was in joint names, buyers could potentially allocate the lion’s share of the property to their sibling.
This is of course a solution, but may not be ideal as the parent is liable for the whole loan which will, of course, be taken into account should they wish to do any borrowing themselves. This could prove restrictive.
The only way for a parent to remove themselves would be when the child could prove to the lender that their own income has risen and they can afford the whole of the mortgage in line with the lender’s terms and conditions. Only then can a guarantor be removed from a mortgage.
For example, if the daughter is a trainee solicitor earning £30,000 and wishes to borrow £300,000, she can only do so with parental assistance. For many lenders the daughter could not take over the mortgage on her own until her income had increased, perhaps after qualification, to the £60,000 level.
Recently, however, we have seen some very interesting schemes that look like they have longevity and may offer an alternative.
For example, one lender has released a series of products which give guarantors the chance to only guarantee part of the loan rather than the whole amount. Under this option, a parent can in effect just cover the additional amount that their child could not borrow by themselves – up to a maximum of 30% of the loan.
Under this option the guarantor’s liability is limited to the borrower’s shortfall (up to a maximum of 30%) plus a further 10% of the debt, should the borrower default on their mortgage payments.
Meanwhile, another high street lender has produced a conveniently titled ‘Lend a Hand’ mortgage. Any “helper”, e.g. parent (or relative), can put up to 20% of the property amount on deposit with the bank.
The parent can help their child without losing valuable interest on their cash or tying it up in a property forever. The risk is that if the borrower defaults on the mortgage, the lender would be entitled to take money from the ‘Lend a Hand’ savings account.
Perhaps most interesting is a new scheme which allows parents to act in a similar way to a local council under a ‘Shared Equity’ scheme. A parent can in effect split the property 50/50 with their child. The parent purchases up to 50% of the property in cash and the child can take up to a 95% mortgage on the remainder.
This is an interesting option for many parents who also want to use their share as an additional future investment whilst helping their kids stand on their own two feet.
Finally, for those clients who comfortably fit the ‘High Net Worth’ bracket, many private banks will work on a case-by-case basis offering a good old-fashioned ‘blank-sheet of paper’ underwriting approach.
Of course, I would always recommend that a parent wishing to pursue one of these options takes their own independent legal advice as well as mortgage advice, as sometimes things may not be as simple as they first seem.
As with everything in this crazy market place, things are never quite as bad as they seem. You just have to know where to look.
To speak to one of our Professional Advisers on this, or any other mortgage related matter, please contact us now on 020 7220 5110
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