How could your family help you get a mortgage?
Mortgages where family members can guarantee or provide security on the loan for a relative are proving more and more popular. These ‘intergenerational’ mortgages have developed in recent times and are becoming increasingly competitive with the rates they offer.
Generating deposits are a main barrier, preventing first-time buyers from getting a mortgage. This makes it easier to see why these family assisted mortgages are increasing in popularity, since finding funds for even a 5% deposit is often a challenge these days.
Whilst the Bank of Mum and Dad is often consulted for help with generating deposits, this isn’t an option for everyone. This is where these intergenerational mortgages are useful. According to Defaqto, these products come in various different forms but all provide a way for one relative (usually a parent) to offer some sort of guarantee to help the borrower obtain a mortgage.
Guarantor Mortgages are the most well-known of these mortgages which allow a parent to offer a guarantee that they will pay back the loan in the event of the borrower not being able to do so.
Security Deposit Mortgages provide a way for a family member to guarantee the deposit without being liable for the whole mortgage. A ‘helper’ could, for example, guarantee £20,000 for a 10% deposit on a property worth £200,000. If the borrower didn’t maintain payments, the helper would only be liable for the £20,000 deposit and not the remaining £180,000 loan.
There are three different types of Security Deposit Mortgages:
A collateral charge mortgage allows the helper to have a ‘charge’ over some of the property, thereby providing some security for the mortgage. They could guarantee a certain amount of the value of the property against their own property and not have to pay anything.
A Linked Savings Deposit is where the helper puts the value of the deposit into a savings account with the mortgage provider and this is security for the mortgage.
An Offset Savings Deposit is a mortgage that is similar to the Linked Savings Deposit except the interest earned on the deposit in the savings account is used to offset the interest rate on the mortgage so the borrower pays a lower interest rate.
These Security Deposit Mortgages all have varying levels of risk and Defaqto have urged anyone wishing to use one of these products to seek independent legal advice first, in order to fully understand the implications of each product.
It has also been advised that although rates between these intergenerational mortgages are becoming more competitive, it is still wise to look at rates across the rest of the market as rates are not necessarily cheap when compared to ‘normal’ mortgages.
Whether you are looking for these intergenerational mortgages of just getting a ‘normal’ mortgage, finding a good, reputable broker to compare the products available to you across the whole market is the best place to start when looking for a mortgage.
Post courtesy of What Mortgage.