By Louisa Fletcher, Property Expert
It’s always been difficult to take that first step on the property ladder, and the economic challenges of COVID-19 certainly haven’t helped. One thing hasn’t changed and that’s the number of families prepared to help relatives take this step.
For the many first time buyers hoping to buy a property this year, news that lenders have reduced the number of 5% and 10% deposit mortgages is likely to be unwelcome.
Typically, first-time buyers rely on the availability of these high Loan to Value (LTV) mortgages due to the smaller deposit required. Their restriction means that many will be relying on help from parents and grandparents to help them get on the ladder, perhaps in larger numbers than previous years.
If you have a parent or family member who is prepared to help you purchase your first home soon - or if perhaps you are that generous parent or family member – what products are available to help? And what are the implications for both the first time buyer and the helper?
Deposits must be gifted
For those who are lucky enough to have someone assist with the deposit for a property purchase, either by making a contribution or providing the full deposit, it’s important to remember that any amount you receive towards the deposit must be a gift and not a loan.
The funds will need to have a clear paper trail. If your parents are gifting you the deposit from their savings, for example, both your mortgage lender and your solicitor will need to see originals of savings account statements to verify that the money has come from a legitimate source. You''ll also need a document ratified by a solicitor to say that the funds provided are a gift, not a loan, that nothing needs to be repaid and that the person who provided the deposit has no rights over the property.
If you’re receiving assistance with your deposit, flag this with your mortgage adviser or broker as soon as you start the mortgage application process so that they can advise you of the correct procedure to follow.
Family assistance mortgages
For those who have a family member with funds available for the deposit but can’t afford to gift them, there’s another option.
If parents or another family member can lend the money required for a deposit for two or three years, Family Assistance Mortgages facilitate this legally.
Although all products have varying terms and conditions depending on the lender, the basic process is the same. The parent or family member lending the funds lodges their savings in a specific, linked savings account with the lender, which then forms the necessary deposit for the mortgage.
Providing the borrower keeps up their monthly payments for the term of the mortgage product, the savings are returned with interest at the end of a pre-determined period, normally when the product expires. These products are offered by a limited number of mortgage lenders, and there are of course differences in product fees and interest rates between products, so it’s worth taking professional advice to understand which option is suitable.
Co-buying and guarantor mortgages
A few years ago, guarantor mortgages were quite commonplace. They enabled a parent to be named on a mortgage to guarantee that the payments would be made every month. These are now much harder to source as only a very few lenders offer them, and even then few applicants meet the necessary criteria. That’s because they involve the same level of affordability assessment on both the borrower and the guarantor, making it particularly difficult if the guarantor already has an outstanding mortgage on another property.
Of course, there’s always an option to co-buy with a parent or family member, but this will again involve an affordability assessment and can create a rather expensive liability around stamp duty if they already own a property. First-time buyers are entitled to stamp duty exemptions which can represent a significant saving.
For example: first-time buyers pay no stamp duty on properties worth up to £300,000, potentially saving up to £5,000 in tax. For properties up to £500,000, no stamp duty is liable on the first £300,000 so tax is only paid on the remaining amount up to £200,000.
To be eligible for the first time buyer stamp duty exemption, anyone named on the mortgage can’t own another property.
Not only would the first time buyer lose their stamp duty exemption, but the property is then also classed as a second home, which means that on top of stamp duty being liable at the normal rate, there is then also an extra 3% stamp duty on each band. That’s quite the double-whammy of tax to pay.
If co-buying with a parent or family member is a route that you want to explore, all parties must talk to a mortgage advisor as early in the process as possible. This way any liabilities around stamp duty can be identified quickly so everyone is aware of what’s payable and when.
Savings make a difference
As low deposit mortgages may be off the menu for some buyers, or at least difficult to source over the next few months, any savings you can make in the meantime may help to tip the balance in your favour.
Setting aside a regular amount in a savings account is a great way to demonstrate sound money management, which will really help your mortgage application. Savings could also make a significant contribution towards a deposit. To put it another way, there are no downsides to saving towards your purchase, regardless of the amount saved. Find out about which ISAs might be best for you here.