First Time Home Buyer Guide
How Parents can Help with the Mortgage
Helping with the mortgage no longer means having to pay for the mortgage. In the face of house prices rising at a quicker rate than salaries, lenders have been forced to design some innovative schemes for first time buyers that write parents into the home-buying process without it actually costing them.
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Joint mortgages: If you are still earning or are in receipt of sufficient monthly income from a pension, you could buy a house together with your child. This would mean that both of your salaries are taken into account when a lender calculates how much you can borrow. Standard lending criteria is currently 3.5 times a single salary. Joint salaries are calculated at 2.75 times both of them or three times the highest plus the lowest. However, please consider that these income multiples are only indicative and individual lenders will apply their own lending criteria. Once on the ladder, your child may be able to afford the repayments independently but be aware that this will not interest the lender. If both names are on the mortgage agreement then both of you will be jointly and severally liable for the monthly repayments, regardless of personal arrangements.
The majority of lenders require that all names on the mortgage agreement must also be stated on the property deeds – meaning you will both be property owners. If and when your child wants to take on the whole mortgage, selling your part to them will amount to a transfer of interest in the land. In this case Stamp Duty – a tax that kicks in ot one per cent on property of £120,000 or more – could be payable. If you claim that your portion of the house is a gift, Stamp Duty will not be payable but you could then be liable for Capital Gains Tax (CGT) as the property is not your sole and main residence. Additionally, should you subsequently die within 7 years it is likely the gift would be treated as a potentially exempt transfer and included in your estate for inheritance tax purposes.
Guarantor mortgages: Most lenders will now offer a ‘guarantor facility' on their standard product ranges. This allows a parent to guarantor any shortfall in income multiples. For example, if your child earns £20,000 per annum, at 3.5 times a single salary, he/she will qualify for a mortgage of £70,000. If the property your child wants to buy is worth £120,000, you would act as guarantor for the difference – in this case £50,000.
Other lenders offer specific guarantor mortgages aimed at graduates or professionals whose salary is set to significantly increase. Some of these providers will only want to see that you can service the shortfall or ‘top slice' of the loan. Other lenders will insist that the parent can service the entire loan if need be.
You do not necessarily still have to be working to act as a guarantor. Instead your overall financial circumstances are assessed with your savings, shares portfolio and assets considered.
The guarantor approach offers your child a greater degree of independence, as your name does not have to be stated on either the mortgage agreement or the property deeds. If and when your child is earning enough to make the income multiples alone your name can be removed free of charge from the lender – although legal fees may be payable.
Family offset mortgages: A traditional offset mortgage is when your savings are kept in a separate account that is linked to your mortgage. Your savings then literally offset against your mortgage debt. For example, if your outstanding mortgage is £120,000 and you have savings of £20,000 you only pay interest on a sum of £100,000. Although this means forfeiting any interest that would be paid on your savings, it also means avoiding the tax payable on this interest. In addition, you are saving interest on your mortgage debt – which is potentially set at a higher rate than the interest you would receive your credit savings balance. The long-term effect of an offset mortgage is that you may save money in interest and cut down the term of your loan.
With a ‘family offset' first time buyer mortgage, the mortgage works in exactly the same way but your savings are linked to your child's mortgage instead of your own. The product allows any number of blood relatives to link their savings to your child's mortgage debt. Savings can be accessed at any time. The interest on the mortgage tracks the Bank of England base rate and comes with no tie-ins or redemption penalties.
Taking a parent's salary into consideration: This is a type of mortgage product that writes parents into the finance but not necessarily the ownership of the property. The deal, which does not require a deposit, calculates the loan size by taking into account four times the parent's income plus the child's. The income does not have to be a salary although if it is a pension, your age will be taken into account.
The benefit of this type of mortgage is that, although both parties must be on the mortgage agreement (meaning you are both jointly and severally liable for the loan repayments), the parent does not have to feature on the property deeds. This overcomes Capital Gains Tax (CGT) issues if the child wants to become sole owner of the property in the near future.
Using the income from your pension: If, when helping your child, you choose an option that takes your income into account, a pension income is usually treated in a similar manner to income from employment. Your monthly income could be from either a private or occupational pension – be it a final salary or money purchase scheme. However, your monthly expenditure from this pension income will also be considered as will your life expectancy. For example if you are going to be 98 years old at the end of a typical mortgage term of 25 years, it is unlikely that a lender will take your income into account. If a mortgage is agreed, it may have to be over a shorter term and on an interest-only basis.
More Information about Parental Help for First Time Buyers
Helping with a deposit l Making a gift l Tax Implications of parents helping children l Legal Implications of parents helping children l Seeking out the right financial advice