First time buyer helping hands
Everyone knows that
first time buyers are struggling to get on the housing
ladder. But more and more lenders are offering ways in which their parents can
help. Laura Milne explains
The rapid growth in house prices over the past few years has prevented many
would-be buyers from buying their first home of their own. It now takes the
typical first time buyer five years to save for a deposit, nearly twice as long
as five years ago, according to new research published by Halifax.
In 2000 the typical deposit was £9,894 equivalent to 42 per cent of the average
earnings. It is now closer to £23,967, equivalent to 76 per cent of the average
earnings of £31,485.
"Times have been getting harder and harder for first-time buyers in the past
few years as they've faced increasing competition from buy-to-let investors,
who have been targeting classic first-time buyer properties, such as one and
two-bedroom flats,” says Nick Gardner of broker Chase De Vere Mortgage
Management.
“This has pushed up prices of first-time buyer properties much faster than the
rest of the market in general, so life is not getting much easier for those
trying to get a foothold on the property ladder.” Rob Clifford of broker
Mortgageforce adds: “We've seen a dramatic increase in the last two years of
people struggling to get on the property ladder. It is partly because salaries
have not kept up with house prices but also because even if they do manage to
get a mortgage they struggle to keep up the repayments by themselves.”
To get round the problem, increasing numbers of first time buyers are turning
to their parents for help with buying their first home. Property advice website
ParentAidNow.co.uk estimates that as many as one in four buyers rely on
financial support from their families when making their first property purchase.
Fortunately lenders have responded to the trend and there are now an increasing
number of innovative ways in which parents can help their children
get on the first rung of the ladder.
Give them the money
The simplest way of helping out is to contribute a lump sum towards the
deposit. A deposit worth 10 per cent, or more, of the value of the property can
save thousands of pounds by giving access to the most competitive deals on the
market. It also helps to avoid higher lending charges (a fee levied by some
lenders of mortgages of over 90-95 per cent of the value of the property)
reducing the ongoing monthly repayments.
Clifford says: “We see many more parents just making capital available to
family members to put down as a deposit, either from their own savings or by
raising a small mortgage on their own property, say for around £20,000. They
can do this reasonably cheaply at rates of between 4-5 per cent. He adds: “Not
long ago lenders would have been difficult about that scenario and would
have wanted the applicant to have a personal stake in the property, that they
owned and saved for, but broadly speaking lenders now prepared take a much more
relaxed attitude.”
Gardner says: “The bigger the deposit you can scrape together, the better,
which is why we are seeing so many parents raise capital from the equity in
their own homes to give to their children for a deposit. “It is easily done and
if the parents or children can afford to overpay that extra capital so it does not
incur interest for the whole mortgage term then releasing money in this way
makes a lot of sense.”
Provided parents live for seven years after they have handed over money for a
deposit, such gifts remain free of inheritance tax. The other main drawback with
this plan is that parents who have more than one child may worry that they
cannot afford to help all their children in the same way.
Loan them the money
This could take the form of a formal agreement between the parent and child to
pay back the loan when the property is sold. Some parents choose to make the
loan interest-free, while some might choose to charge a token rate of interest
amounting to the funds they have lost by not keeping the money in a savings
account. It is worth remembering that interest income is taxable, even if it
received from children. Alternatively, a parent who contributed 10 per cent as a
deposit could reclaim 10 per cent of the property price when the house is sold.
Guarantee the mortgage
Parents who aren’t keen on handing over thousands of pounds of their own
savings can help out by guaranteeing the mortgage. With a guarantor mortgage the
property will be in the child’s name but the lender will ask the parent to
guarantee to cover repayments if the child defaults. A parental guarantee can
either be for the whole of the loan or just for the amount that the child cannot
cover.
For example, a first-time buyer earning £25,000 a year may be able to get a
£100,000 mortgage with a four-fold salary multiple. If the property is valued
at £125,000, the parent could guarantee the £25,000 excess. Rather than using
traditional salary multiples many lenders, including HSBC and Alliance &
Leicester now use affordability tests when making lending decisions.
Clifford says: “In this scenario it’s common for lenders to take a more relaxed
view about income multiples. It’s not unusual for them to agree to lend four
times a buyer’s income rather than three.” Most high street lenders will allow
parents to act as a guarantor for their children on their mortgage ranges but it
is worth remembering that there can be tax implications here.
“If a parent is named on the mortgage and it is not their primary residence
then there may be Capital Gains Tax (CGT) to pay on any profits when the
property is sold, but lenders have thought of ways around that,” explains
Gardner. Norwich & Peterborough Building Society’s Lend A Hand scheme requires
the child to support a minimum of 75 per cent of the loan, while the parent’s
income can be used to cover the remaining amount. Crucially, to avoid CGT
implications the parent is not named on the legal title of the property. Bank of
Ireland also allows a parent to act as guarantor but not be named on the deeds,
while the Woolwich allows parents and children to split the ownership 99 per
cent/1 per cent so the parent’s tax exposure would be
minimal.
Another important consideration is the Higher Lending Charge (HLC). This is
effectively an insurance policy to protect the lender against the borrower
defaulting but, which the borrower has to pay. Lenders such as Northern Rock,
Nationwide and Cheltenham & Gloucester tend not to charge HLCs but their rates
tend to be higher to reflect that. For borrowers whose parents are unable to
raise a deposit Yorkshire Building Society offers a 100 per cent three-year
fixed-rate mortgage fixed at 5.49 per cent to Feb 2009 and no higher lending
charge, free legal and valuation work and no arrangement fee. Yorkshire also
offers a tracker at base plus 0.7 per cent in year one and then plus 1.45 per
cent in year two, then reverting to its Standard Variable Rate (SVR). Again this
deal offers free valuation and free legal work and no HLC.
Apply for a joint mortgage
Instead of remortgaging their own home to raise a deposit for the child’s
property, parents can simply choose to share the child’s mortgage. If the parent
is still earning or in receipt of a monthly income, this would mean that both
salaries are taken into account when a lender decides how much can be
borrowed. If both names are on the mortgage agreement then both parties are
jointly liable for the monthly repayments, regardless of any private arrangement
about who will be responsible for covering the repayments.
It is also worth remembering that if the child decides to take over the whole
mortgage and the property is transferred into their name, the parent could be
liable for CGT and stamp duty, which applies to properties of £120,000 or
more.
Offset your savings
Family offset mortgages are another innovative way of helping offspring onto
the property ladder without having to part with hard-earned savings.
They work by linking the child’s offset mortgage to the savings account to a
family member or friend. The parent sacrifices interest on their savings in
return for a reduction on the child’s mortgage repayments. Clifford says: “Like
other offset mortgages there are tax benefits in doing this because there is no
tax paid on interest earned. The down side is that the parents are not getting
any credit interest on their savings.” Woolwich, one of the first lenders to
provide this type of deal, says that the average savings balance parents give up
interest on is £25,000, which can knock £100 a month of mortgage repayments.
Newcastle Building Society offers a deal where it allows a whole group of family
members to pool together some savings and offset against the child's mortgage.
Newcastle will only lend up to 85 per cent, but on a property costing £100,000,
the child would only have to pay interest on £35,000, if the rest of the family
manages to pool together savings of £50,000. Newcastle offers two deals for this
offsetting scheme: they are both trackers, pegged at 0.50 per cent over base
rate for the life of the loan. One offers the option of paying the completion
fee of £450 and this deal offers a discount to the tracker rate of 0.10 per cent
below base rate for the first six months.
Tips
Try to put down as big a deposit as you can manage. This will open the door to
more competitive deals and will allow you to avoid higher lending charges.
Remember if you give your child more than £3,000 towards a deposit as a gift,
you will have to live for a further seven years before the money can be
discounted from your estate when you die. If you lend your child the money for a
deposit it may be wise to agree a set repayment schedule at the beginning. This
agreement can be made legally binding. Ask your solicitor for advice on setting
up a declaration of trust. There are now a huge choice of lenders who offer
guarantor mortgages. A broker will help you scour the market for the best deal.
Remember if you buy a property jointly with your child which is not your main
home, you may be liable for Capital Gains Tax when you sell. If you buy the
property together you need to decide whether to hold the property as “joint
tenants” or as “tenants in common”. As joint tenants, if one party dies the
other automatically inherits their share without having to go to probate.
Tenants in common status allows each owner to dispose of their share as they
wish.
Some lenders allow you to act as guarantor for your child’s mortgage without
the parent’s name appearing on the deeds but you should also be aware that if
your name is not on the title deeds you do not have any legal claim on the
property. Your child may be able to get further help with monthly mortgage
payments by renting out a spare room. Under the government’s Rent-a-Room scheme
you can earn up to £4,250 a year tax-free.
CASE STUDY
After starting his first job as a trainee reporter in London in 1998 John Rice
was keen to get on the property ladder as quickly as possible as house prices
were rising fast. However with a starting salary of £13,000 he soon discovered
that even the smallest properties were beyond his reach. His father Richard, who
had recently retired, had a lump sum to invest and stepped in to help. The pair
quickly found a suitable two-bedroom flat in Bermondsey, south London, for a
bargain price of £112,000. "My dad invested £15,000, £10,000 of which I put down
as a deposit," says John, now 29. "I used £2,000 for conveyancing fees and stamp
duty and spent the remaining £3,000 on repainting the flat, having new carpets
laid and buying furniture." John and Richard opted for a parent guarantor
mortgage with NatWest. "I was able to cover the monthly repayments of £900
without help from my dad by getting a friend to rent the spare room. I was only
21 at the time and
hadn't been in my job for very long, so having my dad act as guarantor
provided a bit of extra security for the bank. The idea was that he would help
out if I started to struggle, although that never happened.
The purchase proved to be a shrewd financial investment for both John and
Richard. The flat was revalued in 2001 at £240,000 when John's fiancee Helen
moved in. The couple agreed to buy out Richard's share for £70,000 and raised
the extra capital by remortgaging with Northern Rock.
John says: "By 2001 interest rates had fallen substantially, which meant that
our new repayments were only about £100 more a month and didn't need to
extend the mortgage. We recently had the flat valued again and its now worth
in excess of £300,000." "We both thought that property would be a good
investment and guessed that it might appreciate by about 6 per cent a year but
none of us expected to increase in value they way it did," he adds.
Ist Start Scheme
This scheme was pioneered by Bank of Ireland but is now also offered by its
subsidiary Bristol & West. It allows first-time buyers to get financial help
from their parents, but without the parents having to
liquidate any of their own
assets to help them with a deposit.
It works by offering the child an income multiple of four times their salary,
or, more usefully, will lend four times the parent's income, once the parent's
existing mortgage payments have been deducted. For example, someone earning
£20,000 a year would qualify for an £80,000 mortgage. But if the parents earned,
say, £35,000, and paid £3,750 a year in mortgage payments (based on a £75,000
mortgage at five per cent), Bank of Ireland would lend four times the remainder,
amounting to £125,000, plus it would into account the child's income of £20,000,
giving total loan of £145,000.
“This is a much more flexible approach than most guarantor type schemes, and is
actually classified as a joint mortgage,” says Gardner. “However unlike a joint
mortgage Bank of Ireland say that the parent's property is not at risk
because the mortgage is secured on the child's property.”
This article has appeared in Mortgage Magazine which is available in all good
newsagents. Copyright MSM International Ltd
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