Saffron Building Society has become the latest mortgage lender to allow first-time buyers to use savings from a family member as security when buying a home.
The 95% loan to value (LTV) deal requires both the borrower and their family to put in 5%. But the money from the relatives is stored in a savings account as security.
This is only the latest in a long line of deals where family members can help first-time buyers onto the property ladder, with some even letting you buy deposit-free. But each deal works in a slightly different way, so you need to understand the ins and outs.
Here, we explain how this deal works and how it compares with other products targeted at buyers with low deposits.
Saffron’s new guarantor mortgage
The new product, which has no arrangement fees, allows buyers to secure a lower rate than a typical 95% deal from Saffron.
Buyers on this mortgage will pay 2.97% interest (4.64% APRC) over a five-year fixed-rate period. By comparison, a standard five-year fixed-term mortgage from Saffron is 3.27% (though the APRC is the same, at 4.64%).
The deposit from the family member would be held in a savings account for the five year length of the mortgage and returned with interest of 0.75%.
In addition, the upfront 5% deposit can be gifted by a family member.
The deal is similar to one launched by Lloyds earlier this year, where buyers were able to buy with a 100% mortgage, but 10% of the property value had to be deposited into a savings account.
How does Saffron’s mortgage deal compares
There are a number of mortgages on the market that accept family members’ savings as security.
However, the interest paid on the deposited money and the time when the savings are unlocked varies.
The table below shows the best ‘savings as security’ guarantor mortgages according to MoneyFacts.
As the deals differ so greatly, you should make sure you check:
- the initial rate and the revert rate.
- the APRC of the deal.
- the length of the initial term.
- whether the rate is fixed or variable.
|Provider||Mortgage name||Savings required (% of new property cost)||When are the savings unlocked?||Interest paid on savings|
|Barclays||Family Springboard||Minimum 10%||Three years||2.25%|
|Family BS||Family Mortgage – Security through Savings||Varies||On review||1.15%|
|Lloyds||Lend a Hand||Minimum 10%||Three years||2.50%|
|Loughborough||First Time Buyer Family Deposit||£5,000 – £75,000||Once amount guaranteed has been repaid||0.00%|
|Marsden||Family Step||Up to 20%||One mortgage reaches 80% LTV||1.35%|
|Mansfield||Family Assist||20%||Seven years||1.00%|
|Saffron||Family Support||5%||Five years||0.75%|
|Tipton||Family Assist||20%||Once mortgage reaches 80% LTV|
Keep in mind that these deals aren’t risk-free. If you miss any mortgage repayments, the lender could hold on to your family member’s savings for a longer period.
And if the lender had to repossess and sell your property, they could recoup any difference outstanding from the mortgage from your family member’s cash.
In addition, the rate you earn on your savings is comparatively low. The rate of inflation was stuck at 1.9% in March, meaning only Lloyds and Barclays offer inflation-busting interest rates on the cash holdings – so your money may be losing value in real terms.
As you own so little of the property outright, you also risk slipping into negative equity – where you owe more than the property is worth – if house prices drop in the early years of your ownership.
Read more: guarantor mortgages explained
Types of family deposit mortgages
The above deals all focus on offering up savings as security, but there are other types of guarantor mortgages that allow family members to help out.
Property as security
Your family member can offer a charge on their home, typically between 20% and 25% of the property value, as security for the mortgage.
The relative must own a certain share of the property outright, which can be between 25% and 60%.
These types of mortgages are being offered by lenders Aldermore, Bath, Buckinghamshire, Family Building Society, Loughborough, Marsden, Mansfield, Nationwide, Post Office and Tipton.
In the worst case scenario, if the lender had to repossess and sell your property for less than the remaining mortgage amount, your family member could lose their home.
- Find out more: 100% mortgages
Family offset mortgages
These loans require a family member to put their savings into an account linked to your mortgage.
If you took out a mortgage of £100,000 and your family member deposited £20,000 in your account, then you would only pay interest on £80,000 of the loan.
But if the lender had to repossess your property and there was a shortfall, they could recoup the money from your family member’s savings.
Family Link mortgage
With the Post Office Family Link mortgage, you can borrow up to 100% of a property’s value. You borrow 90% with a mortgage against the property you’re buying, and the remaining 10% as a mortgage secured against your family member’s home, which they must own outright.
If you miss any of your mortgage repayments, your family member is only responsible for the 10% that you borrowed against their home.
Joint Borrower Sole Proprietor (JBSP) mortgage
A joint borrower sole proprietor mortgage allows a parent to help their child buy a home by adding their security to the mortgage.
But unlike a standard joint mortgage, the parent isn’t named on the title deeds. This means first-time buyers can still benefit from the stamp duty discount, which could save them thousands.
Read more: JBSP mortgage
If you wanted to avoid the bank of mum and dad, then you can secure a mortgage and a potential a 5% deposit up front.
Earlier this month, Loughborough Building Society offered a market-leading 95% two-year discount mortgage.
But as a general rule, you’ll often end up paying higher rates than you might with a larger deposit, and you run a higher risk of slipping into negative equity.
Read more: 95% mortgages
Additional reporting by Stephen Maunder