It’s a difficult time for first-time buyers, with low deposit mortgage options drying up and the stamp duty holiday offering tax cuts to competing home movers and buy-to-let investors.
First-time buyers have long relied on the ‘bank of mum and dad’, with many parents gifting deposits to help their children buy homes.
But COVID-19 has given mortgage lenders the jitters, meaning they’re now asking for bigger deposits – thereby increasing the burden on parents who want to help out.
Here, Which? explains how guarantor mortgages could be an alternative option to the bank of mum and dad for first-time buyers and their parents.
Low deposit deals continue to suffer
|Loan-to-value||Number of deals (March 2020)||Number of deals (August 2020)|
Despite the property market reopening, banks have been slow to reinstate low-deposit mortgages, meaning many buyers will need a deposit of at least 15% to get a loan.
There are some alternatives, however. Guarantor mortgages allow parents to use their savings, property or earnings to help their child buy a home.
Guarantor deals haven’t been immune to the cull, but a handful of providers are continuing to accept applications.
- Find out more: how to save a house deposit
Using your savings as security
These guarantor deals allow parents to deposit 5% or 10% of a property’s value into a special savings account with their child’s mortgage lender, taking the place of a standard mortgage deposit.
This acts as collateral in case the child defaults on their mortgage.
Savings are usually locked up for three or five years. Some lenders pay interest on savings, but others don’t.
When we evaluated the market in late 2019, nine lenders offered these types of mortgages. Today, that figure has dropped to four.
- Who offers them? Barclays, Family Building Society, Mansfield, Tipton
- COVID-19 withdrawals Lloyds, Loughborough, Marsden, Saffron and Halifax have suspended their deals.
- Summary Allows parents to keep control of their cash rather than gift it to their child, but interest rates may not be attractive.
Using your property as security
These deals allow parents to use their property as security against the child’s mortgage.
The bank will usually secure a charge of between 10% and 25% of the new property’s value against the parent’s home.
Once the child has paid back a big enough proportion of their mortgage, the charge will be released.
10 lenders offered these deals in late 2019, but now only five providers are considering applications.
- Who offers them? Buckinghamshire, Family Building Society, Mansfield, Nationwide, Tipton
- COVID-19 withdrawals Bath, Loughborough, Marsden and the Post Office have suspended their deals. Aldermore withdrew its deal in November 2019.
- Summary Doesn’t require the parent to put up their savings, but their house will be at risk if their child defaults.
Joint mortgages allow a parent and child to join together to buy a property.
This means parents can use their income and savings to boost the child’s mortgage changes.
There are two big pitfalls, however.
First, the parent will be jointly responsible for the mortgage. Second, if they already own their own home they will need to pay a stamp duty surcharge, which can run to thousands of pounds.
- Who offers them? Lenders tend not to offer specific ‘joint’ mortgages. Instead, some will consider joint applications on their normal mortgage range.
- Summary Could offer the child a mortgage boost, but the stamp duty costs make this option much less attractive.
Like joint mortgages, Joint Borrower Sole Proprietor (JBSP) deals allow parents and children to club together to get a mortgage.
The big difference is that only the child’s name will be on the property’s deeds, meaning the parent will be able to avoid the stamp duty surcharge.
JBSP mortgages are relatively niche. Older parents may struggle to get accepted and lenders may prefer applications where the child can prove their earnings will rise significantly in the future.
Unlike some products that use the parents’ saving or property as collateral, joint and JBSP mortgages will still require the buyer to put up a deposit, which varies from deal to deal.
- Who offers them? Some lenders consider JBSP applications on their standard ranges. Those offering specific products include Newcastle, Furness, and Hinckley and Rugby.
- Summary A viable way of boosting mortgage chances without incurring the stamp duty surcharge, but the limited choice may mean higher rates.
‘A JBSP deal helped me buy my first home’
Kyna Marshall, 24, from Lincolnshire, bought her first home using Newcastle Building Society’s Joint Mortgage Sole Proprietor deal.
She told Which?: ‘I was originally looking to buy a home on my own, but my mortgage broker suggested that a joint mortgage could improve my chances of getting accepted.’
Kyna took out the mortgage with her mother. As her mother was 49 at the time of the application, Kyna was able to take out a 30-year mortgage term.
She says: ‘The process was quite straightforward and it enabled me to get a better house than I would have been able to afford on my own.’
Newcastle relaunched its JBSP deal last week, having withdrawn it in the wake of the COVID-19 outbreak.
Should I take out a guarantor mortgage?
Guarantor mortgages can be attractive, especially at a time when there are few low deposit mortgages available.
That said, there are a couple of key considerations.
First of all, a guarantor mortgage creates a financial link between parent and child, with the parent potentially putting their savings or property on the line if their child defaults. Money can be an emotive issue, so think carefully about whether this is a wise move.
Second, rates are likely to be more expensive than deals on the open market. So while a guarantor deal might help your child buy a home, it’s important to think about the ongoing costs of borrowing and ensure the mortgage is affordable.
If you’re considering a guarantor deal, it’s worth taking advice from a whole-of-market mortgage broker, who can assess your financial circumstances and explain which products might be most suitable.
Tips for parents helping first-time buyers
Guarantor mortgages are only one way that parents can help their child on to the property ladder.
Our guide on how to help your child buy a home includes 10 key things parents should think about before handing over money or signing up for a guarantor mortgage.