Mortgages: Banking on Mum & Dad?
Buying a house as a first-time buyer is notoriously tricky. What’s more, it has been getting even more difficult as of late. A range of factors, from stagnating wages to increased credit risks, can make it harder for many would-be homeowners to get their plans off the ground. However, the family could be an answer to your troubles.
Here with the help Jason Bailey mortgage broker at comparison website Lending Expert we’re going to take a look at why first-time homebuyers are having trouble and how a little help from their parents could be the solution that they need.
First-time buyer woes
Until this year, there were more people moving home than buying houses for the first time since 1995. Despite the ongoing recovery of the British economy, slow wage growth is considered one of the major reasons that the past twenty years have seen a decline in first-time homeowners. The average price of a home has raised by 35% in the past five years, with deposits at an all-time high. It’s raising money for the deposit that proves the biggest hurdle of all, but it’s not the only one.
The process of applying is often considered another hurdle, as well. Under-30s have the lowest credit score on average out of every age range, with younger people at a natural disadvantage because of the weight that the length of your credit history has in your score. Furthermore, a steady employment history is another key factor for traditional lenders. Fewer people are staying employed at any one position, moving from role to role and employer to employer instead.
A little help from my family
More and more young people are relying on the help of mum and dad, and even grandma and grandad, to pass the first and greatest hurdle of attaining a mortgage: saving for a deposit. Gifted deposits are becoming much more common, with many older family members raiding their savings to either give the money or to lend it.
While a gifted deposit is rather straightforward, borrowing the money for a deposit can have an impact on the mortgage application process. If the loan is formalised with a written and signed agreement, it still counts as a loan in the eyes of lenders like banks. This means that it can affect the affordability assessment. With a loan on an application, the buyer may not be able to borrow as much or may find themselves facing higher repayment rates.
However, lenders are fast recognising both the difficulty that first-time buyers have, as well as the growing role that parents and grandparents have in supporting the current housing market and have a few solutions of their own to offer beyond taking out a second mortgage.
The guarantor mortgage
One of the options offered is that of the guarantor mortgage. With this kind of loan, first-time homebuyers can take on larger loans than they might otherwise be allowed to. This is because they have a guarantor, often a parent or grandparent, offering some security for the debt. In most cases, a family member will offer up collateral, such as their own property, to make the option available. 25% equity on that property is the usual minimum requirement, and the lender puts a charge on that.
The security of a guarantor allows first-time homebuyers to buy with a smaller deposit without having to cope with huge mortgage repayments. If the borrower can keep up with the repayments, their guarantor has to pay nothing. However, should the borrower default on the loan, the responsibility is shared by the guarantor. They may have to remortgage the home or, in dire situations, may face repossession.
Family springboard mortgages
Another option is the family springboard mortgage, which works a little differently. In this case, parents or grandparents will link their savings account to the borrower’s mortgage. The money isn’t accessible to the children, but acts as the deposit, allowing the borrower to skip the step of raising more money while contributing to the overall repayment lowering repayment interest. During most of the repayment period, this money is locked away, inaccessible to the parents.
When the borrower pays off a significant chunk of the mortgage and the remaining amount matches the amount in the savings account, the money will be freed up again and the borrower will continue to pay off the rest of the loan that was once covered by the savings account.
Making mortgages more accessible
Parents are playing a larger role in the growth of first-time buyers, leading to 2018 being the first year in twenty that new homeowners account for more than half of all home purchases. Talk to your lender about which of these options are available if you think you could use a little help from the family.