So-called ‘intergenerational mortgages’ have developed in recent years and, according to new analysis, are offering some of the most competitive rates on the market.
It’s no wonder they are proving so attractive as soaring property prices mean getting together a deposit for even 5% can be challenging for even the most determined first-time buyer.
While many borrowers are turning to the so-called Bank of Mum and Dad to get help with their deposit – this is not an option for all families. Here’s where intergenerational mortgages – of which there are currently 28 on the market – come into their own.
According to financial information provider, Defaqto, these products come in various different guises but all provide a way for one person – usually a parent or relative – to offer a guarantee to help a borrower get a mortgage.
Guarantor mortgages
Guarantor mortgages are probably the most well-known. These allow a parent, relative or friend to offer a guarantee they will pay back the loan if the borrower cannot.
There is obviously a certain amount of risk involved in this on the part of the guarantor.
Security deposit mortgage
With guarantor mortgages providing so much risk potential, some borrowers look instead to ‘security deposit’ mortgages.
These allow the friend or family member – known as ‘the helper’ – to guarantee the deposit or a set amount only. As such they are not 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 did not keep up repayments and the debt was called in, the helper would only be liable for the £20,000 deposit and not the remaining £180,000 loan.
Katie Brain, insight analyst for Defaqto, said: “With property prices so high, some young people are having to turn to family in order to get their first home. Not many people have the cash to put down a deposit for a relative’s home and security deposit mortgages can be a good alternative for them.”
There are three types of security deposit mortgage:
Collateral charge
These mortgages allow the helper to have a ‘charge’ over some of the value of the house, thereby providing security for the mortgage. They could guarantee £20,000 against the value of their own home, without paying anything.
Linked savings deposit
The helper puts down the value of the deposit – for example £20,000 – into savings with the mortgage provider. This acts as security for the mortgage but has the added benefit the helper will receive interest on their money for a fixed period, typically three to five years.
Barclay’s Springboard mortgage, which was recently revamped, and Lloyds Lend a Hand are examples.
Defaqto said some offered competitive interest rates on savings which compared favourably to the rest of the savings market.
Offset savings deposit
These mortgages are similar to linked savings deposits but the interest earned is used to offset the interest on the loan. As such, the helper will not receive interest on their savings but the borrower would benefit from a lower interest rate.
What to watch out for…
Security deposit mortgages all come with a varying amount of risk. In fact, Defaqto urges anyone considering these products to seek legal advice to ensure they fully understand what they are signing up to.
Katie Brain added: “With traditional guarantor mortgages, the guarantor will be credit checked and their income taken into account for the first-time buyer’s mortgage and it will need to cover the total loan amount.
“It’s important that borrowers read and compare the terms and conditions of these products because they do vary.”
Interest rates
Meanwhile, Nick Morrey, product technical manager at mortgage broker, John Charcol, warned potential borrowers to weigh up the cost when looking into these deals.
While Defaqto’s figures show competitive rates as low as 2.75% for borrowers, anyone considering these options would be wise to look at rates across the rest of the market.
He explained the rates were not necessarily that cheap when compared to ‘normal’ mortgages. “If someone has the cash but would prefer to not give it as a ‘gift’ to their children they may be swayed when they see the difference in rate between these arrangements and a ‘normal’ product for the same loan to value (LTV),” he said.
Morrey also explained that for many lenders these products were quite a small part of their business. As such, there was little awareness in amongst potential borrowers of their existence and therefore a lack of education. For many first-time buyers, he said, they may not realise these were available as options.
Getting advice
He suggested getting a good broker to help when comparing these products. And added: “For people looking to get a 100% LTV mortgage who had parents or grandparents with some cash or equity in their property and a very generous desire to help then these are a great option. But they can’t help those without ‘wealthy’ relatives.”
Morrey said he would welcome the return of the 100% mortgage for those who can afford to make the required monthly repayments.
He added: “They would not be suitable for everyone though. In the absence of such a dream I welcome what these lenders have done and I would welcome more to do the same, making this space more competitive and encouraging rates to fall for consumers.”
