Three little-known first-time buyer schemes to get help onto the property ladder from your family
THE Bank of Mum and Dad is set for one of its busiest years.
Parents, grandparents and other relatives will be helping more than 318,000 buyers on to the property ladder this year.
That’s more than any other year since insurer Legal & General started tracking the trend in 2016.
Surging rent and other living costs have made it harder for buyers to raise a deposit on their own.
Laura Suter, a personal finance expert at investment firm AJ Bell, says: “With average rents at almost £15,500 a year, they are taking up more than half of the average person’s take-home pay in the UK.
“It means that getting on the housing ladder without the help of the Bank of Mum and Dad will feel like a pipe dream to many.”
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L&G found that two out of five parents and grandparents aged 55 and over have helped to fund a family member’s purchase of a home.
And one in five has done so using some of the value of their own property.
Worryingly, the majority of older relatives supporting younger buyers do not seek formal advice, it found.
Craig Brown, chief executive of L&G’s home finance division, says: “This is a big decision and people should carefully consider how and what they give to ensure they don’t risk running into their own financial difficulties later in life.”
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Here, Leah Milner looks at the different mortgage schemes that allow family to help home buyers and what all sides need to consider before using them.
FOR those looking to help their relatives get on the ladder there are lender schemes they can use. Here are some of the key options and how they work:
JOINT BORROWER, SOLE OWNER
LOTS of lenders now offer so-called “joint borrower, sole proprietor” mortgages.
This is where parents or other trusted helpers go on to the mortgage to help buyers pass affordability checks, without actually becoming property owners.
It means that the bank can take into account the parents’ or helpers’ income as well when deciding how much to lend.
Aaron Strutt, of broker Trinity Financial, says: “These have become increasingly popular because parents who are already homeowners can offer support without the buyer being hit by higher stamp duty.”
People buying an extra property pay three per cent on top of normal stamp duty rates — even if the property is under the £250,000 threshold at which the tax normally applies.
Some lenders require that the helper is a close family member. Most have a maximum age the eldest borrower can reach by the end of the mortgage term.
For many it’s 70 or 75, but Metro Bank will go up to 80, Family Building Society up to 95, so long as the eldest borrower has sufficient income to support the loan.
Parents and grandparents considering helping in this way will be linking their credit files to the younger borrower — so their score could be hit if their relative misses a payment for anything from mobile bills to credit cards.
They are also legally responsible for paying the mortgage if the borrower they are helping fails to do so.
Aaron adds: “With all of these schemes, it’s crucial for helpers to get their own independent legal advice to fully understand the risks involved.”
LINKED SAVINGS ACCOUNT
RATHER than handing over a cash gift towards a deposit, relatives can put money into a linked account where it is still their own money but it is held as a security in case the borrower defaults.
With the Lloyds Lend A Hand and Barclays Family Springboard schemes, a “helper” sets aside ten per cent of the purchase price in a savings account with the bank.
It means the buyer can borrow up to 100 per cent of the home’s value without having to fund the whole deposit themselves.
It also means the parent or helper will still earn interest on their savings.
However, it will remain tied up for three years with Lloyds or five years with Barclays.
It could be locked away for longer if the borrower falls behind on mortgage payments.
So for a property worth £200,000, a helper would put £20,000 into the savings account.
With Lloyds, it’s a three-year fixed saving rate paying 4.7 per cent and earning £940 per year.
With Barclays it’s a five-year variable rate, currently paying 6.96 per cent, or £1,392 on the same sum, but this will drop if the Bank of England cuts rates.
The buyer borrows up to £200,000 and pays interest on it.
Helpers could lose some or all of their money if the borrower stopped making payments and their home was repossessed.
In that case, the bank could recoup any money between the debt and what they get from reselling the property from the helper account.
OTHER OPTIONS
OVER-55s can use lifetime mortgages, a form of equity release.
It’s a way to borrow without having to make monthly repayments as the debt can be paid back when the property is sold, when the homeowner dies or goes into long-term care.
But average rates have soared from 4.17 per cent in October 2021 to 7.09 per cent now, says site moneyfactscompare.co.uk – meaning it has become far less popular over the past few years.
One of the stumbling blocks for parents and others who want to lend money to younger relatives to help with a deposit is that banks normally insist this is legally declared as a gift and the buyer doesn’t have to pay it back.
But under the Deposit Booster scheme from the lender Generation Home, family members can lend money to support buyers and set their own terms without having to give their cash away.
For buyers who aren’t able to call on financial help from family, a Lifetime Isa can boost their deposit fund.
It is open to savers from age 18, and for every £4,000 they add each year, the Government provides a £1,000 top-up.
But it must be used towards the purchase of a home or savers are hit with a 25 per cent penalty if they need to withdraw cash before they turn 50.
Key numbers
- 318,000 family members plan to help other relatives buy a home this year
- £15,500 is the average yearly rent and equates to more than half of the average wage
- 2 in 5 parents and grandparents over 55 have helped a relative get on the property ladder
- 1 in 5 of them used equity from their own home to help, often without advice
'We have an agreement to repay our parents'
PARENTS Chae and Cem Sarjant had to get support from the Bank of Mum and Dad to buy their family home in April last year.
They found the perfect two-bedroom house in East Finchley, North London, just around the corner from Chae’s mum Harjit, 58, a retired barrister who helps to look after the couple’s sons Kayden, five, and one-year-old Mason.
Shop assistant Chae, 28, and partner Cem, an IT consultant, had managed to save £15,000, but needed to raise a total of £100,000 to buy their dream home for £466,000.
Although their parents were willing to lend them £85,000, banks normally insist that family members declare they do not require the money back before it can be used as part of a deposit.
So the couple used the Deposit Booster scheme from lender Generation Home, which allows family or other helpers to lend a sum to the buyer and set their own repayment terms.
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Chae says: “We have an agreement to repay our parents the amount when we sell the home so while they have given us the money, it’s more like an interest-free loan.
“The scheme was a lifeline for us as there’s no way we could have afforded a home otherwise.”