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Family Mortgages Explained
Getting on the housing ladder has never been so difficult – and for new parents or young growing families, getting help from family may be the only option. But if your parents don’t have the cash for a large deposit sitting in a savings account, how else can they help?
There are several different ‘family’ mortgages that enable parents or other family members to give a helping hand to younger family members who want to get onto the housing ladder but don’t have the large deposit needed.
The first thing to point out is that interest rates are generally higher for this type of mortgage, normally because there is a high loan to value figure (ie. you are borrowing all or most of the money for the new property). Some lenders even offer cashback deals to act as an incentive. The interest rate should not necessarily put you off, but it is something to bear in mind. In a market where property rental rates are far higher than mortgage repayments, and where 100% mortgages are both expensive and hard to find, interest rates are often less of a concern. However, every situation is different and there is no substitute for expert individual and independent advice.
So how do family mortgages work?
Family mortgages – unlike ‘springboard mortgages’ (which we mention further down) use the equity in the parents’ (or other family members’) house as security on the new mortgage.
It is also important to point out that using these family mortgages does not mean that the helping family owns any part of the property. The mortgage will still be in the names of the first-time buyers.
At this moment in time, there are only a handful of family mortgages on offer, but as mentioned, availability and offerings change with great regularity within the mortgage arena. Below we detail three of the main products:
The Family Mortgage requires the purchaser to have a 5% deposit, which can be gifted from family, as well as security offered by family savings or using a property as a guarantee.
The Family Deposit Mortgage requires helpers to have an existing mortgage with Nationwide – and instead of depositing funds into a savings account, the equity in their home is used as security. This could put their home at risk if payments aren’t made, but it does mean they don’t have to stump up any actual cash.
The Family Link Mortgage is similar. The Post Office lends 90% of the property value, with the other 10% coming from equity in the helper’s mortgage-free home. The 10% must be paid back within five years.
Family springboard mortgages
‘Springboard’ mortgages are another kind of mortgage that requires a family member or members to deposit funds into a savings account, where they are held for anywhere between three and five years. As long as payments are met, the money is returned, usually with a favourable interest payment. These include the Barclays Springboard Mortgage and Lloyds Lend a Hand Mortgage.
Any other options
There are also another couple of options. A mortgage with a guarantor requires a family member to secure your mortgage with assets such as savings or their own property. It can be risky for the guarantor if repayments aren’t made.
A mortgage with a gifted deposit is where the family member gives you the money for a deposit. In this case the lender will want to check that the money comes from a credible source – such as their savings – and not from a loan from elsewhere.
Joint tenants or tenants in common
Another thing to consider is whether you are ‘joint tenants’ or ‘tenants in common’. Joint tenants hold an equal share of the property, and full ownership automatically passes to the other. If one of you (or your family) has invested more cash than the other, it is possible to divide your ownership rights to reflect this, in a ‘tenancy in common’ agreement – if you die, your share of the property will go to the person named as your recipient in your Will.
As you can see, there are a number of different options available, depending on the borrower’s and the helper’s circumstances, so it is important to get advice before committing yourself.
If you would like to discuss family mortgages or any other financial matter, J Finance Ltd will be happy to help. Please contact us without obligation.
Established in Berkshire in 2004, J Finance Ltd is one of the leading financial planning companies in the area. They serve clients across England and Wales. If you would like to discuss your mortgage or protection, please contact them on 01635 521 300 or email [email protected] You can find out more about J Finance on their website at www.jfinance.co.uk.
YOUR MORTGAGE IS SECURED ON YOUR HOME, WHICH YOU COULD LOSE IF YOU DO NOT KEEP UP YOUR MORTGAGE REPAYMENTS. BE AWARE THAT INTEREST RATES MAY CHANGE SO ENSURE YOU CAN KEEP UP REPAYMENTS.
J Finance Ltd was founded in 2001 by Jonathan Bright and is a financial services company located in Newbury, Berkshire – though we serve the whole of the UK. We are a team of financial advisers and mortgage consultants who are focused on giving you, our clients, professional advice along with outstanding customer service. We do this by developing long term relationships and offering an excellent, personal service. We’ll take the time to discuss your current situation and your plans for the future, and we’ll use this information to help identify the best financial products for you.