Types of mortgage
By Marie Kemplay
Article 4 of 10
Learn about how your family could help you on to the property ladder with guarantor mortgages, family offset mortgages and family deposit mortgages.
Understandably, many parents want to give their children a leg up on to the property ladder, and there's an increasing number of mortgages coming on to the market that enable them to do so.
The most common options are guarantor mortgages, family offset mortgages and family deposit mortgages.
The good news is that, with parents or close family willing to take on some of the risk of lending to a first-time buyer, lenders are prepared to put up more cash, and at a better interest rate, than they otherwise would.
However, these mortgages come with risks for both the parent and the homebuyer, so it’s important to consider very carefully whether they are the right option for you.
- We believe you should take independent advice before choosing a mortgage. Which? offers an independent mortgage advice service, Which? Mortgage Advisers, that looks at thousands of mortgages and can help you work out what's best for your situation. Call for a free initial consultation on 0808 252 7987.
With a guarantor mortgage, a parent or close family member guarantees the mortgage debt. This means that if the buyer misses their mortgage repayments, the guarantor will have to cover them.
Traditionally with these types of mortgage, mum and dad were responsible for repaying the whole mortgage loan if their child defaulted on their mortgage payments. But there are an increasing number of mortgages on the market where there is a limit on the amount the guarantor is responsible for.
How guarantor mortgages work
Aldermore is one example of a lender offering guarantor mortgages – and with this company, you can borrow up to 100% of a property's value. A parent or grandparent must then guarantee the amount of mortgage above 75% of the value of the home.
Normally, the family member guaranteeing the mortgage offers their own property as collateral against the property, which means that, in the worst case scenario, a guarantor could lose their home to cover the debt. But if no repayments are missed, it won't cost the guarantor a thing.
Family offset mortgages
With family offset mortgages, parents or grandparents put their savings into an account linked to their child's mortgage. The money in the savings account is then deducted from the mortgage, making the child's repayments cheaper.
There is a potential downside to this type of mortgage, though. Parents will be able to get their money back in full, but they may have to lock it away until the mortgage has been paid off to between 75% and 80% of the property's value, which could take quite a long time. Parents also won't receive any interest on their savings while they are offsetting their child's mortgage.
Yorkshire Building Society offers mortgages of this type.
Family deposit mortgage
Some lenders, such as Barclays and Market Harborough Building Society, now offer mortgages where a family member deposits cash in a special savings account and the money is held as security against the mortgage.
This cash is then held for a fixed period of time. If the mortgage borrower defaults during this period, the money will be taken from the savings account.
The benefit of family deposit mortgages is that the family member still gets interest paid on the money linked to the mortgage, although the rate might not be as good as with other savings accounts. And if the borrower meets all their repayments, it won't cost their family anything.
Flexible family mortgages
In addition to these types of mortgage, the Family Mortgage from the Family Building Society offers a flexible approach for relatives looking to help.
Provided that the first-time buyer has a 5% deposit, parents or family members have three options.
The first option is to put 20% or more in a savings account that pays interest as security for the loan. The building society still provides a 95% mortgage to the first-time buyer, but the security provided by the family member's savings means that the first-time buyer pays a lower interest rate on their mortgage than is generally available on mortgages of this size.
The second option is for the parent or family member to use some of the value in their own property as security, and the third option is for the family member to place savings in an offset account, which reduces the amount of the mortgage on which interest is charged. It's also possible to do a combination of all three.
- Last updated: September 2016
- Updated by: Marie Kemplay