Over the last few years, it has been increasingly difficult for first-time buyers to get onto the property ladder. Following the pandemic, demand for homes skyrocketed as people’s priorities changed. Instead of wanting to be close to public transport links and amenities, there has been increased demand for homes with more space inside to accommodate home working, and larger gardens or better access to green spaces. The lack of supply combined with the stamp duty (LBTT) holiday and historically low interest rates has continually pushed up prices.
Although low-deposit mortgages returned last year, banks are still wary of lending to those seen as higher risk especially with the current rise in living costs.
We now find ourselves in a situation where many first-time buyers have been priced out of the market and unable to secure borrowing. This is where the Bank of Mum & Dad can step in.
According to Legal & General, over 80% of parents have helped their children with a gift or a loan towards a deposit to purchase a property. However, banks have become increasingly aware that parents are unable to help their children or grandchildren to buy a first home with cash. There are other options as banks have made available schemes to help parents who wish to enable their children to buy their first home.
There are various schemes to help parents assist with a property purchase for their children – guarantor mortgage, family mortgage, joint mortgage, and joint borrower sole proprietor mortgage. All of these make it less risky for the lender and enlist the help of a family member to help a first-time buyer to purchase their first home. With these schemes, the bank will allow parents to provide collateral on the loan either by a charge over an existing property or by putting money into a specific savings account. There may be an age limit for a guarantor, which is usually 75 years old.
Parents will effectively loan their savings for a set period of time as collateral and will be able to access to the money at a later date with interest – this means that they aren’t left out of pocket by helping their children. In this case, parents will need to consider where else they would put their money and whether they’ll miss out on valuable interest. In addition, this type of lending can be more expensive than other standard loans, but in some instances having a guarantor can be enough to reassure lenders in offering high LTV mortgages. It’s also worth considering whether there will be any tax implications which is why we would strongly recommend getting independent financial advice (and something lenders will insist upon).
Some loans, such as joint mortgages, enable parents and children to buy a property together, but both parties will need to appear on the deeds of the property too. This can have tax consequences if the guarantor already owns a property such as their own home which is highly likely. This will mean that they will have to pay a stamp duty (LBTT) surcharge of 3%. To avoid this, you could opt for a joint borrower, sole proprietor mortgage. This names the guarantor on the mortgage but keeps their name off the property deed which then avoids additional capital gains tax and stamp duty liabilities.
If you are considering a specialist mortgage when helping your children onto the property ladder, then talk to The Mortgage Hub today. We can talk to you about the options.