What are family assisted mortgages?
When it comes to family assisted mortgages, there are generally two types that allow family members to help gain a mortgage other than gifting cash towards a deposit. Sometimes a family member can act as a guarantor, while in other cases, a family member can place funds or secure equity in the property with the lender, which is a less risky loan and, therefore, generally on better terms.
How do family assisted mortgages work?
Joint borrower, sole proprietor mortgages
Typically, anyone named on a mortgage must also be on the property deeds. If the supporting family member already has a property – like many parents – the new home would be a second property for stamp duty purposes. Many lenders will allow multiple people to be on the mortgage application but not require them to own the property, which mitigates this issue. They essentially act as guarantors, providing additional income.
Deposit assisted mortgages
Those with just a 5% deposit may find that a mortgage is hard to secure because they present a very high risk to lenders due to the low amount. The reason is that if lenders have to take possession of a property, they often lose up to 15% in administrative and legal costs. As a result, when a customer has more than 15% equity in a property, it is considered less risky. “The bank of Mum and Dad” is a standard solution, but relatives may not be able to gift this amount of money. Some lenders will allow parents to deposit funds in a locked account, often earning interest or other benefits, in the parent’s name, which is held until repayments on the mortgage. This result in a less risky amount of equity. Some lenders even allow a charge to be held against another property for the same purpose, which is ideal for those who have enough equity but don’t want or are unable to remortgage to release it.
Who are family assisted mortgages suitable for?
Joint borrower, sole proprietor mortgages can be suitable for those at the beginning of a career where incomes can initially be low but rise quickly once more qualified. Doctors and lawyers are good examples of this type of career. Lenders are keen for applicants on these schemes to afford the mortgage on their own within around five years. Buyers on low incomes without an expected uplift may find it more difficult.
Those who have lower deposits may also find that they are assessed for affordability purposes more stringently, and so by utilising a scheme such as a family assisted mortgage, not only can they benefit from lower rates, they can often borrow slightly more too. The reduced rates may also mean they can afford to borrow more, so it’s a great way of bridging that gap without needing to give cash to their children.
What are the pros and cons?
The major disadvantage with joint borrower, sole proprietor mortgages is that the oldest person’s age can impact the maximum term and repayments. For example, a mortgage of £200k over 25 years at 3% interest would likely be around £950 a month. If the eldest person was 55 on their next birthday, the longest term available, up to their retirement age of 67, might be just 12 years. Therefore, this would increase the mortgage repayments to £1655 a month, a considerable increase.
Joint borrower, sole proprietor mortgages are complex to arrange, and some risks are inherent in placing security against a home. Some people might have paid off a mortgage and be reluctant to have that hanging over them again. Others may not feel the rates offered in the linked account are competitive or that the resulting mortgage isn’t the cheapest it could be and decide that simply handing over the cash is the better option for their children or family member.
Family assisted mortgages schemes vary significantly between lenders, and talking this through with a broker at AALTO Mortgages Ltd could identify solutions that suit your specific circumstances. We can also explain all the factors to prospective donors and ensure they are comfortable with the potential risks. When you choose AALTO, we will ensure that you get the right advice and the lowest cost solution for your needs.