First-time lenders can borrow against parent's home

Posted by Erika Bone in Mortgages on 9 December 2016 - Erika is a Credit Analyst at checkmyfile

In recent decades, the “bank of mum and dad” has increasingly become a cardinal resource for their offspring achieving independence and for first-time buyers attaining a foot on that all-important first rung of the property ladder.

Assistance usually occurred in the shape of large sums of cash being plundered from parents’ savings accounts to stump up for a hefty deposit, but a number of mortgage lenders have seen an opportunity for property rich but perhaps cash poor parents to help their fledglings fly the nest.

The Market Harborough Building Society is the most recent in a growing number of small, independent mortgage providers to realise the potential in utilising the “house” of mum and dad in securing a mortgage for their children. The “Family Assist Mortgage” allows first time buyers to borrow 100% of the value of a property on the premise that the borrowers’ parents take out a second mortgage on their home or a property that they own. There is a stipulation that the loan to value (LTV) total cannot exceed 75% which limits the offer to parents who have a great deal of equity in their home. The typical interest rate of 3.99% is 1.5 % lower that MHBS’s standard variable rate but the agreement is subject to a 0.5 % arrangement fee with a minimum charge of £1250.

Parents who may recoil at risking their house on the whim of their child but are reticent in giving their children their life savings may be more inclined to favour the “Family Spring Board Mortgage” offered by Barclays. First-time buyers are offered 100% LTV mortgage if a family member/ loved one can provide 10% of the property price in cash as security. This agreement has a 2.99 % fixed interest rate for 3 years, is fee free and the family member gets their savings back after the 3 years with interest as long as the repayments have been made. This agreement may be seen by the guarantor as a prudent investment, especially if interest rates increase, however they will need tremendous faith in the principle lender and their ability to pay their bills.

After the 2008 recession, almost all mortgage providers stopped offering high LTV mortgages after thousands of borrowers fell into negative equity when house prices plummeted. Over the last few years, smaller lenders such as provincial building societies have started to accept 100% LTV mortgages and are again showing why they are very often at the forefront of innovation when it comes to supporting first-time buyers and inter-generational mortgage products.

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