Halifax is now allowing first-time buyers to take out a 100% mortgage, but they’ll need a helping hand from a family member.
The new Family Boost mortgage is the latest guarantor product on the market, and could prove an attractive option for parents willing to lock up their savings to help their child get on to the property ladder.
Here, we take a look at the pros and cons of the Halifax deal, and offer advice on taking out a guarantor mortgage.
Halifax launches ‘Family Boost’ mortgage: how does it work?
The new deal from Halifax allows first-time buyers to borrow up to 100% of the value of a property, removing the need for an upfront deposit.
There is a catch, however. The borrower will need a family member to put up to 10% of the purchase price in a savings account, which they won’t be able to access for three years.
During this three-year period, the money will live in a special Halifax savings account, where it’ll earn 2.5% interest.
The new mortgage is available to buyers in England and Wales and applicants can borrow a maximum of £500,000.
If your child stops paying the mortgage, the full amount of savings could be at risk.
The difference between no-deposit deals and 100% mortgages
There’s been lots of talk about the possible return of the 100% mortgage over the past year or so. However, it’s still the case that no lender has launched a true 100% deal since the financial crash a decade ago.
Since then, all so-called ‘no-deposit’ mortgages have required some form of guarantee from a parent or family member, with either savings or property as collateral, as with the Halifax deal.
New guarantor mortgage products are just one way lenders are innovating to attract more first-time buyers.
In the last year, we’ve seen banks launching mortgages with fixed terms of up to 15 years, ‘professional mortgages’ that allow people with specific jobs to take out bigger loans, and an increase in the number of deals offering cashback to people with small-deposits.
Guarantor mortgages: what are my options?
Guarantor mortgages generally fall into one of the three categories below.
Rates, repayment terms and borrowing limits vary significantly on these products, but here’s an overview of how they work.
Savings as security
These deals involve a parent or family member (the guarantor) locking up their savings as collateral. Savings are at risk if the child fails to meet their mortgage payments.
- Which lenders offer these deals? Barclays, Family Building Society, Halifax, Lloyds, Loughborough, Mansfield, Marsden, Saffron, Tipton.
- How much will the guarantor need to deposit? Common amounts include 5% (Saffron), 10% (Barclays, Lloyds, Halifax) or 20% (Mansfield, Marsden, Loughborough) of the purchase price.
- When will they get their money back? After three (Lloyds, Barclays, Halifax), five (Saffron) or seven (Mansfield) years. Some lenders instead release the cash once the amount saved has been paid off the mortgage, or the overall loan-to-value on the mortgage drops to a specific level.
- Will the guarantor get interest on their savings? Usually, yes. Lloyds and Halifax (2.5%) and Barclays (2.25%) pay the highest rates.
- Which mortgage types are available? Three and five-year fixes, some lenders also offer discount deals.
The new Halifax deal pays a joint market-leading interest rate to parents when they lock up their money for three years. This rate is impressive, given that market-leading three-year savings accounts currently only pay up to 2.45% interest.
These deals can make sense for parents who want to maintain some control over their cash (rather than gift a deposit), and see their investment grow over time.
The trade off to this is that guarantor mortgages usually have higher interest rates than standard 90% mortgages. This means the child’s monthly repayments can be more expensive than if they were gifted the cash and took out a conventional deal.
Property as security
The guarantor has a charge secured on their property, which can be called in if the child defaults on their mortgage.
- Which lenders offer these deals? Aldermore, Bath, Buckinghamshire, Family Building Society, Loughborough, Marsden, Mansfield, Nationwide, Post Office Money, Tipton.
- Is the parent’s home at risk? Most lenders secure a charge of 20% of the value of the new property on the parent’s home, though Post Office Money uses a charge of 10%.
- When is the charge released? This varies from lender to lender. For example, Aldermore sets a maximum guarantee period of 10 years.
Alternatively, parents can use their home as security for their loan.
Lenders will usually secure a charge of around 20% of the new property’s value on the parent’s home. To be eligible, the parent will need to own a specific amount of equity in their home (or in some cases, own their home outright).
These deals are an option for parents who can’t or don’t wish to offer cash to their child, but with the significant caveat that their home is at risk if their child defaults on the mortgage.
Savings to offset mortgage
The guarantor puts savings into an account, which are then offset against the balance of the child’s mortgage.
- Which lenders offer these deals? Family Building Society and Vernon.
- How much will the guarantor need to deposit: 20% with Vernon, or a minimum of £5,000 with Family Building Society.
- When does the guarantor get their money back? As long as mortgage payments are up-to-date, Vernon will release the savings after four years.
- Will the guarantor get interest on their savings? Interest won’t be paid as the savings will be used to offset interest on the child’s mortgage.
Family offset mortgages work like this: if a child takes out a mortgage for £100,000 and the family member deposits £20,000 on savings into an account, the child only needs to pay interest on £80,000 of the loan.
The upside of these deals is that only the parent’s savings are at risk, rather than their home. The downside is that the parent will be locking away their savings for a number of years without earning any interest.
JBSP mortgages: an alternative to guarantor deals
- Which banks offer these deals? Barclays, Buckinghamshire, Clydesdale, Furness, Hinckley & Rugby, Market Harborough, Metro, Tipton & Coseley.
Joint borrower, sole proprietor (JBSP) mortgages are an increasingly popular alternative to a guarantor or joint mortgage.
These deals involve a parent and child taking out a mortgage together, but only the child being named on the property’s deeds.
This helps parents avoid the additional stamp duty they’d need to pay if they took out a joint mortgage, and means they won’t need to put up savings or a property as security, as with a guarantor mortgage.
JBSP mortgages come with strict criteria, however. The parent will need to have their financial circumstances assessed, and older parents may find themselves ineligible for a normal mortgage term of 25 years.
Choosing a guarantor mortgage: five tips for parents
- Take independent financial advice: Acting as a guarantor involves risking either your money or your property, so you’ll need to ensure you’re in a suitable position to make such a decision. Consider taking independent financial advice and speak to a mortgage broker about which type of deal might be right for you and your child.
- Consider the cost for both parties: As well as the impact on your property or savings, think about the cost of a guarantor mortgage for your child. Guarantor deals often have higher interest rates than standard residential products, so it’s important to ensure your child isn’t over-stretching their finances.
- Look at other deals and schemes first: A guarantor mortgage might seem attractive at face value, but it’s not right for everyone. Ensure your child properly assesses the pros and cons of other first-time buyer options, such as 95% mortgages and the Help to Buy scheme.
- Think about what you want to do with your cash: The big question with guarantor mortgages is ‘do you want to invest your money or gift it to your child?’. If the answer is the former, Halifax’s new mortgage could be a decent option. If you’re willing to gift the cash to your child, you might be better avoiding guarantor mortgages altogether.
- Consider your relationship with your child: Taking on one of these deals with your child is a big commitment, and if it goes wrong it could affect your relationship in the future. Weigh up the pros and cons of taking this risk before you rush in.