For the first time in a long time, helping first-time buyers get on the property ladder seems to be the focus for the government as well as mortgages providers.
With a raft of new mortgage products available on the market, the message for first-time buyers is a positive one. Getting a mortgage, however, is only possible if they can raise a deposit. A study by Nationwide has found that on average, first-time buyers have to save for eight years to get a suitable deposit in place.
The bank of mum dad
Parental lending has quickly become one of the most crucial options for first-time buyers. According to research from Legal and General in association with Cebr, in 2016 parents spent more than £5bn helping their children buy a home. 57% of parents helped with a cash gift, though almost one in five (18%) offered an interest-free loan.
However, a number of lenders are taking steps to help buyers struggling to fund a deposit. Before 2008, 100% mortgages were commonplace – today they are a rarity, but that is not to say that they don’t exist, albeit with different lending criteria. The Post Office has launched two new mortgage deals to help first-time buyers without the means to raise a deposit for their first home purchase.
Owen Woodley, chief executive of financial services and telecoms at the Post Office, said that its research had found significant numbers of parents were keen to help their kids buy a property but were unable to offer direct financial support.
Using a parent’s home as collateral
The Family Link mortgage allows first-time buyers use the home of a close relative as collateral against their house purchase. By placing a mortgage on two properties, 90% against the property being bought and 10% against a relative’s homes, first-time buyers can borrow 100% of a property’s value.
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Both loans must be paid off by the borrower, but the 10% secured against a relative’s property is an interest-free loan that must be paid off within five years, and the remaining 90% charged at 4.89% fixed for five years is repaid over a normal mortgage term.
Using the equity of a family member’s home technically as a deposit means that first-time buyers can get on the property ladder without relying on the bank of mum and dad to stump up the large deposit. It means that parents who may not have access to large sums of cash can assist their children with their first property purchase using the equity tied up in their own property, as long as they have an annual income of £20,000 or more.
David Hollingworth, of mortgage brokers L&C, said: “A first-time buyer purchasing a £200,000 property in this way would pay £1,041 per month for the interest-charging loan and a further £333 a month to pay off the loan on the family property.”
Increase the amount a first-time buyer can borrow
The second mortgage product available through the Post Office is the First Start mortgage, where a first-time buyer can apply alongside a relative who acts as a co-borrower and can be named on the title of the property. Effectively a joint mortgage, this enables the income of the relative to be taken into account allowing the first-time buyer to borrow a larger sum.
Parents with savings could consider an offset mortgage
The Post Office is not alone in trying to help first-time buyers. The Family Building Society and Barclays both offer family offset mortgage products to first-time buyers, where parents place their cash into a designated savings account to reduce the cost of borrowing for their children. With an offset mortgage, the savings are linked to the mortgage balance and you only pay interest on the difference. The big benefit for parents is that they get to protect their savings rather than handing over a large sum of cash as a deposit.
While the old 100% zero deposit mortgages are not set to make a comeback, it seems lenders are more keen to support first-time buyers wanting to get on the property ladder than in recent years.