Mortgages for Parents and Kids
There is a number of ways in which a parent can help their child on to the first rung of the property ladder. Many of these, such as making a gift for a deposit, are detailed along with their tax and legal implications in our first time home buyers guide to how parents can help.For the latest options contact our mortgage advisors for advice.
Helping with the mortgage no longer means just helping to pay for the mortgage. In a difficult market, lenders have been forced to design some innovative schemes that write parents into the home-buying process without it actually costing them. In the UK, it is no longer rare to let a parent help with mortgage payments - in fact these days it is quite common. To find out all the latest ways of how parents can help first time buyers, request mortgage advice. Parents can act as guarantor, put savings aside to offset against interest or as surety against an unexpected inability to pay the mortgage and there are a number of possibilities.
In our table of best first time buyer mortgages we cover a selection of mortgages for parents and kids. New mortgages come onto the market all the time and with the lenders being so keen to do business with first time home buyers it's worth taking mortgage advice as soon as you are ready to take the financial plunge. Here are some of the options however:
1 First Time Buyer Mortgages: Mortgages for Parents and Kids: Joint Parent-Child mortgages:
If a parent is still earning or is in receipt of sufficient monthly income from a pension, a parent could buy a house together with their child. This would mean that both salaries are taken into account when a lender calculates how much they can borrow. Standard lending criteria is around 3.5 times a single salary. Joint salaries can be calculated at over 2.75 times both of them or three times the highest plus the lowest. These income multiples are only indicative and individual lenders will apply their own lending criteria. Once on the ladder, the child may be able to afford the repayments independently. A parent-child mortgage can be a practical solution - but not without capital gains issues if the parent also owns some of the property.
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 the 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 Land Tax could be payable. If it is claimed that the parents 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 the parents sole and main residence.
Additionally, should the parent 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. We work with tax planning experts who can help you.
2 First Time Buyer Mortgages: Mortgages for Parents and Kids: 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 the 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 the child wants to buy is worth £120,000, the parent 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.
It is not necessary to still be working to act as a guarantor. Instead, overall financial circumstances are assessed with your savings, shares portfolio and assets considered.
The guarantor approach offers the 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 the 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.
To ask about which mortgages are right for you and your family, and for any re-mortgaging advice, take mortgage advice.
3 Mortgages for Parents and Kids: First Time Buyer Mortgages: Family offset mortgages:
A traditional offset mortgage is when 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' mortgage, the mortgage works in exactly the same way but your savings are linked to the child's mortgage instead of the parents. 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.
To ask about which family mortgage is right for you and your family seek mortgage advice.
4 Mortgages for Parents and Kids: First Time Buyer Mortgages: Taking your own 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 ages 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.
To ask about which mortgages are right for you and your family seek mortgage advice.
5 Mortgages for Parents and Kids: First Time Buyer Mortgages: Using the income from a Pension:
If, when helping a child, an options is chosen that takes your income into account, a pension income is usually treated in a similar manner to income from employment. A parents monthly income could be from either a private or occupational pension – be it a final salary or money purchase scheme. However, monthly expenditure from this pension income will also be considered as will your life expectancy. For example if the parent is 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 their income into account. If a mortgage is agreed, it may have to be over a shorter term and on an interest-only basis.
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Features, advantages and disavantages of specific first time buyer mortgages:
100% Mortgages l Cashback Mortgages l High LTV Mortgages l Graduate Mortgages l Professional Mortgages l Mortgages with Parents l Guarantor Mortgages l Family Offset Mortgages l Mortgages with Friends or Family l Mortgages at University l Rent a Room Mortgages l Affordable Mortgages l Interest only Mortgages l Part Repayment Part Interest Mortgages l Interest-free Start Mortgages l Shared Ownership Mortgages l Poor, Adverse or Poor Credit Mortgages l Key Worker Mortgages l Shared Equity Mortgages
Other mortgage guides, advice and useful pages:
Mortgage Comparison - First Time Buyer Mortgages - About First Time Buyer Mortgage Advice - First Time Buyer Mortgage Brokers - Buy to Let Mortgages for First Time Buyers - Remortgages for First Time Buyers - Shared Ownership Mortgages - Help with Mortgages for First Time Buyers - Shared Appreciation Mortgages - Joint Mortgages - Financial Advice for First Time Buyers - Overseas Mortgages for First Time Buyers - Request First Time Buyer Mortgage Advice - Find your First Property - New-Build Gifted Deposit Deals - Best First Mortgages Comparison Table
www.cml.org.uk – council of mortgage lenders.