First-time buyers who are struggling to find a mortgage because of the current lack of deals for those with a 5% deposit could benefit from investigating some lesser known borrowing avenues.
The Bank of Mum and Dad, although not open to everyone, could be still be worth exploring even for those borrowers who think their parents might not hold the key to their property buying dreams.
For there are several products out there which allow parents to support their children without losing or giving up too much of their vital income or saving themselves.
This week researchers at Moneyfacts.co.uk have taken a look at ways in which first-time buyers and the so-called Bank of Mum and Dad could work together and – either one or both – potentially come out with a gain.
Guarantor mortgage
Guarantor mortgages involve a family member or friend ‘guaranteeing’ the mortgage repayments by offering their own home or savings as security against the loan.
They provide a way for people with a 5% deposit to get onto the property ladder because the guarantee takes away some of the risk usually associated with loans which are for such a large proportion of a property’s value.
Barclays Family Springboard is a popular example of one of these mortgages. Not only because it des what is says on the tin and offers borrowers with small deposits a ‘springboard’ onto the ladder but because the parents or relatives offering the guarantee get something out of this too.
Eleanor Williams, a finance expert at Moneyfacts, said: “With savings rates continuing their downward trajectory and current average rates across the various types of accounts all below 1% for the first time since our records began, Mum and Dad may be struggling to get a competitive return on their own savings pot at the moment.
“Here, a guarantor mortgage such as the Barclays Family Springboard mortgage product would be another route that may actually be of benefit to both parties.”
The 95% Barclays Family Springboard mortgage priced at 2.85% for five years requires the borrower to put down 5% deposit.
The family member, meanwhile, puts in a further 10% of the purchase price into a Helpful Start savings account, also for five years.
Williams explained: “If all mortgage repayments are met, the helpful family member will receive their money back, with interest at the end of the five years.”
What’s more Williams has calculated a first-time buyer who takes out the Barclays Family Springboard mortgage could see a monthly reduction in outgoings of £165.24 less per month than they could face on the average rental payment, and over the five-year term lower outgoings to the tune of over £9,000.
“Overall, both the home buyer and the Bank of Mum and Dad could come out of this better off,” she added.
Joint borrower sole proprietor (JBSP)
Don’t be put off by the not-so-snappily titled name of this mortgage. The JBSP is a mortgage where the first-time buyer is the sole owner but they can have their parents’ – or other family members’ – income taken into account when applying for the loan.
The main benefit of this is that parents who want to help their child onto the property ladder by supporting their application won’t get hit with the 3% stamp duty surcharge on second properties because they are not an ‘owner’.
Williams recommends Saffron Building Society’s JBSP offering which is available to first-time buyers who are struggling with affordability for their own 95% mortgage.
She said: “This deal enables a family member to have their income taken into consideration towards any shortfall required to purchase the property, without having their name on the deeds.
“Again, when compared to the average monthly rental cost of £951, based on borrowing £190,000 on the current product rate of 3.47%, this would cost £100.99 less per month – therefore potentially £6,000 less over the initial five-year fixed rate term.
Providing a deposit boost
While there are few 95% LTV mortgages for borrowers with 5% deposits, if you can increase your initial sum up to 10% a few more options could open up to you.
Just in the last week alone, Nationwide – the second biggest lender – re-entered its 90% LTV product for first-time buyers back to the market. With other lenders returning to this market too, there are certainly a few more options if you can increase that deposit up a notch.
This is often where the Bank of Mum and Dad can provide a helpful boost. While there is no gain for the parents in this scenario, it could help reduce the buyer’s outgoings if they are currently renting.
Indeed, Moneyfacts calculated the average rental payment of £951 per calendar month while the average repayment on HSBC’s five-year fixed rate 90% LTV mortgage at 2.59% would be £233 less.
Williams said: “While the Bank of Mum and Dad themselves may not benefit financially from gifting some or all of this deposit, those buying their first home and swapping from the average rental payment to this monthly mortgage payment clearly would. Over the five-year term, this could amount to over £13,000 less leaving their pocket.”
Get advice
Finally, whether you are opting for one of the avenues above, or simply need help looking for another first-time buyer deal it’s a really good idea to seek advice from mortgage broker or intermediary who covers as much of the market as possible.
Some brokers have access to deals which may not be available directly to consumers. But they also have a wealth of knowledge and will do lots of the heavy lifting for you during the mortgage process.
It’s a tip which Williams endorses. She said: “Anyone who wishes to consider one of the specialist products available to take that first step onto the property ladder would be very wise to seek independent, qualified advice.
“Not only is the mortgage market a very changeable landscape at the moment with products updating constantly, but speaking with a broker may well be invaluable in navigating the various products and help to ensure that the best decisions for individual circumstances are taken into account.”
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