In the summer of 2020, when the UK started to emerge from lockdown, the release of pent-up demand and a revived housing market prompted a surge in transactions and an increase in house prices. The average house price reached a record £224,123, reported the Guardian newspaper – a rise of 3.7% in the previous 12 months.
The surge in house prices almost certainly came as bad news to first time buyers already struggling to put together a deposit, so predictions that prices are set to fall again over the coming 12 months might have seemed a welcome break.
But according to a story in the Financial Times recently, even if house prices fell by as much as 20%, first-time buyers would still have a more challenging time getting that first step on the housing ladder than they would have done just a year ago.
Against such a depressing background, first-time buyers may be looking increasingly to their family to help with the purchase of their first home.
Indeed, the so-called “Bank of Mum and Dad” is the 11th largest mortgage lender in the UK and in 2019 was lending an average £24,000 (a huge jump from the average £18,000 just the year before) to help their children buy a home.
Parents and family have helped in several different ways – by giving a financial gift, for example, providing a loan, standing as a guarantor on a mortgage, or becoming co-signatories to a joint mortgage.
But the mortgage market has also responded to this upsurge in financial help from a family member by devising specialist mortgages, especially for first-time buyers.
The family springboard mortgage
As mortgage lenders have cottoned on to the capacity for families to help younger members buy their first home, the new products now offered by some of those lenders go various names: such as family boost mortgage, family deposit mortgage, or family springboard mortgage, depending on the particular lender.
What makes these mortgages different is that they typically involve a special, linked savings account into which the parents or family members make their contribution.
The amount of savings then typically needs to reach at least 10% of the purchase price of the first-time buyer’s home. Provided the savings remain in the account for the next five years, the lender treats the money as security against the possibility of the homebuyer defaulting on the mortgage repayments.
Using a family deposit mortgage in this way gives the lender sufficient confidence and security to extend a full 100% mortgage to the homebuyer – so avoiding the need to scrimp and save for a deposit.
Take the example of a £200,000 home bought with a 100% mortgage and no mortgage deposit by the first-time buyer. Security is provided by £20,000 (10% of the purchase price) in a special savings account for at least five years.
At the end of that time – provided the mortgage payments have been maintained – the £20,000 savings are returned to the “helpers” with interest accumulated over that period.
How much can I borrow on a family mortgage?
Lending criteria naturally vary from one lender to another, but some may lend you up to five and a half times your income if you are above a threshold of £50,000 a year (on a single or combined income). For incomes less than £50,000, the maximum loan might be reduced to four times the annual household income.
Of course, the affordability of the mortgage will also need to be checked, as well as your other financial circumstances, to ensure you can comfortably afford the monthly mortgage payments.
How can I find the most appropriate deal?
The concept of family member mortgages is relatively new, and by no means all lenders will yet have suitable products – or products that are flexible enough to meet the specific needs and circumstances of you and your family members.
The detailed workings of different family member products are also likely to vary from one lender to another – not least, for example, the savings rate of interest that can be earned on the savings that are being used as security for the mortgage.
To identify those lenders currently offering family mortgages, the most attractive mortgage rates, and to assess the relative merits of competing products, therefore, you might want to consult your mortgage broker.