One of the main barriers to buying a home for many people is finding the deposit. The latest ONS data shows the average house price in England is £269,000. With most lenders asking for a 10% deposit as minimum, this means you’ll need to find £26,900 just for the deposit.
If you have no deposit or only a 5% deposit, your options are limited. But there are ways around it and one of them involves getting help from your family, if they are willing and able to do so.
If you are lucky enough to have parents or other family members who are able to gift you money for the deposit, that’s all well and good. But note that lenders will want to see proof that this is a gift and not a loan.
If parents or another family member lend money directly to their child or relative, this will impact on how much the lender is prepared to lend. Lenders view this as a loan that the borrower will be paying back and is part of their financial outgoings. Therefore, this will affect how much the borrower can afford to pay on the mortgage.
However, there is a way where the family can lend money to the buyer, and get their money back at a later date, without the borrower paying it back.
This is where a family mortgage can be beneficial.
A family springboard mortgage is also known by other names such as family boost, family deposit mortgages and family mortgage. It is part of a group called guarantor mortgages where someone else guarantees the mortgage.
A family springboard mortgage is a home loan where your family helps out financially by putting up security on the mortgage either with savings or their own property.
Putting up security on the mortgage means that the lender is covering the risk of the borrower (you) defaulting on the loan. In other words, if the borrower goes into arrears and the home has to be repossessed, the lender can turn to the family member putting up the security for the family springboard mortgage. The family member is liable to pay for what is owed if the borrower cannot cover the costs.
A family member (or members) provides 10% to 20% of the value of the home, which is put into a savings account for a specified amount of time. This is usually 3 or 5 years, but 10 years is also available.
The money in the savings account earns interest and at the end of the term the money is given back to the family member. But this is only if certain conditions have been met.
Once the money has been deposited into the savings account, additional money cannot be added at a later date.
It is important to note that the property is fully owned by the borrower. The family member is not a part owner of the property and their name will not be on the title deeds.
Only a few lenders offer this type of mortgage, but they tend to each have different criteria and generally will lend on properties up to the value of £500,000.
Anyone in your family can participate in a family springboard mortgage.
While this is typically mum, dad, or grandparents, other relatives may be acceptable to lenders such as aunts and uncles. What’s more, children can also help their parents or grandparents to buy a home. Some lenders will allow friends to participate, but others restrict it to just family members.
Generally, just one or two people will provide the money, however, there is a lender who will allow 12 family members to participate in total.
When there is more than one person involved, they will each have their own savings account.
If family members can afford it, they can be part of more than one family mortgage. Perhaps parents want to help all of their children onto the property ladder.
Some lenders do not ask for a deposit while others require 5%. The rest of the deposit is made up by the contribution from the family member.
It enables you to get on the property ladder with little or no deposit
Your family member will receive interest on the money they have deposited
You should be able to get a better interest rate than if you put down no deposit or a 5% deposit.
In essence, the lender views the deposit as the 5% you have put down plus the 10% from the family member, making a total deposit of 15%.
This means your loan to value (LTV) ratio is 85% and better interest rates are available at lower LTVs (compared to a 95% LTV deal).
If you could put down a 5% deposit and add on 20% from the family member this would bring your total deposit to 25%. This takes your LTV ratio to 75% where even lower interest rates are available.
Essentially, the higher the LTV, the riskier the loan is to the lender. The more deposit you can put down, the less risk you pose and the lower the family springboard mortgage rates you will be offered.
Your family member has no access to their money until the end of the arranged term – usually 3 or 5 years, although it could be more. So, it is important that they can afford to lend this money for the agreed amount of time.
If you fall into arrears and your home is repossessed, your family member may not get some or all of their money back.
In some cases, the family member’s own home may be at risk of repossession
If the borrower can’t pay the mortgage and falls into arrears, this could have an impact on the money their family member has given them.
The money may not be released back to the family member until the mortgage is no longer in arrears; or has not been in arrears for a certain amount of time (such as 1 year).
The family member is at risk of not getting some or all of their money back if the property ends up being repossessed and has gone into negative equity. This means there is a shortfall on the money owed so the lender can use money in the savings account to cover this.
Family springboard mortgages are predominantly aimed at first time buyers and some lenders will only lend on this basis. But there are lenders who will lend to home movers who want to use a family mortgage.
Most family mortgages are taken out for 25 years although some mortgage providers will lend for up to 35 years. You will, of course, pay more overall the longer you have the mortgage. If you are considering taking out a family loan, you can use a springboard mortgage calculator to work out how much you can afford to borrow, and search for family springboard mortgage reviews to find out more.
Apart from depositing money into a savings account via a family springboard mortgage, there are two other ways that family members could help you get on the housing ladder:
By using their own home as security
By setting up a family offset account.
Instead of putting the money into a savings account, the family member can use some of the value in their own property as security. The advantage with this is that the family member does not need to have cash.
However, if the borrower goes into arrears or their home is repossessed, this could impact on the family member’s home as well. It could even result in repossession in order to repay any shortfall.
An offset mortgage is where your savings and mortgage are linked. The more savings you have, the lower your mortgage. The savings do not earn interest but instead are ‘offset’ against your mortgage.
For example, if your mortgage is £200,000 and you have £40,000 in savings, you only pay interest on £160,000. As you make your mortgage payments, the mortgage balance lowers accordingly as does the amount of interest you pay. As mortgage rates are usually higher than savings rates, this can be a good option, especially if you are able to make higher payments than what is required each month.
The family offset mortgage works in a similar way except it is the family member or members whose savings are used to help the buyer. The money deposited into the offset account is a one-off payment and additional funds cannot be added.
Once the buyer has paid off an agreed amount of the mortgage, usually 25% to 30%, the savings are returned to the family member.
As with the other family mortgage options, the family member’s savings could be at risk if the borrower defaults on the mortgage and the home has to be repossessed.
Generally, the family member must be a homeowner and have a mortgage. Some lenders state they must own their property outright so therefore they do not have a mortgage. Others insist the family member has their mortgage with the lender.
Some lenders may also require the family member to have a minimum income or a minimum amount of other savings not linked to the family mortgage.
Each lender is different so it is best to speak to a mortgage broker who will know which family mortgage is best for your individual circumstances.
The family member will need to take independent legal advice so they are fully aware of their responsibility and the implications of being part of a family springboard mortgage.
This cannot be from the same solicitor that is dealing with the house purchase. You can use the same firm as long as the solicitor is different.
As the borrower and the family member are linked financially through the family mortgage, any arrears and repossession will be recorded on the credit record of both parties. That could impact your credit score and future ability to get credit.