When you are building your career and thinking about getting on the property ladder, your next step is to starting doing some sums. You work out the salary multiplier to see how much you might be able to borrow from a mortgage lender, and it can be a stark reality to see how far off you are from the property prices you are looking at.
This is where a joint borrower, sole proprietor mortgage could be the right solution.
If your parents are in a position to take out a mortgage with you, this article is for you.
Our experienced team of qualified mortgage advisers at PIL Southampton explain how these mortgages work, and we delve into the pros and cons you will want to think about if you are considering this option.
This is the most common type of family mortgage product, to help young people to buy a home when they can’t afford to do it on their own.
These mortgage products basically work in the same way as when you get a joint mortgage with a partner, in that all parties named on the mortgage application will have to meet the provider’s lending criteria and you will all be jointly liable for the mortgage repayments, i.e. responsible for paying the whole amount if the other parties’ default.
Everyone who is named on the deed will have a legal claim to owning the property and these details need to be clearly stated in the terms of your agreement.
Whenever a mortgage is taken out by more than one individual, you need to establish how the ownership of the property is going to be legally defined.
In a ‘joint tenants’ scenario, both parties jointly own 100% of the property, which means that they will be entitled to an equal share of any profit if the property is sold, and they will automatically inherit the other party’s share if they die. The joint tenant’s option is typically used by joint borrowers who are either married or in a long-term relationship.
A ‘tenants in common’ arrangement is different in two fundamental ways. One, you choose who you leave your share of the property to in your will – it is not automatically inherited by the other – and, two, you don’t have to own an equal share of the property. These two factors usually make this option more appropriate if you are buying with a family member or a friend.
Whichever type you choose, it is important to take professional advice before you make your decision. And, if you go for the tenants in common option, it could be wise to set up a deed of trust outlining each tenant’s ownership share to avoid any misunderstandings in the future.
As long as all mortgage applicants meet the lending criteria, we would expect your mortgage application to get a favourable outcome. Lenders take all parties’ income into account on a joint mortgage application, which can make the younger party’s application more substantial and significantly increase your borrowing power with more financial weight.
If they are in a position to, it can be really rewarding for parents to support their child in this way, to help them to get a foot on their property ladder when they may not otherwise have been able to do so.
Do remember, though, that sole applicant mortgages are easier to arrange and don’t have the associated risks of relying on the other party to make their share of the payments.
There may be other options that are more suitable for you – if you think you will be able to make the monthly repayments but can’t come up with the deposit, perhaps you could ask your parents for a gifted deposit (we talk more about this later) or you could consider taking out a personal loan.
If your relationship with your parents tends to be volatile, it may not be sensible to enter into a financial arrangement like this with them.
It could be problematic if all parties are not wholly in agreement about ownership and when the property can be sold.
Also, when you take out a mortgage with another party, your credit reports are automatically linked for the term of the loan so, if one of you has a poor credit score, it could hinder the other’s chances for obtaining credit in the future.
You also need to think about…
If the property is bought for less than £425,000, first time buyers in England, Wales and Northern Ireland are exempt from paying stamp duty. If your parents are not first-time buyers and you are buying with them jointly, you will lose out on this substantial discount.
If your parents are already homeowners, they will have to pay the 3% second home surcharge on the standard rate of stamp duty.
And, when you come to sell, if the property is classed as your parents’ second home, then any profit would be liable for capital gains tax.
Most lenders will stipulate that the mortgage term needs to end before a borrower reaches a certain age. At the lowest end, this would be 65, but some lenders will accept the borrower being in their 70s and even their 80s.
If your parents are going to go over this age cap before the end of your mortgage term, you may have to take the mortgage out over a shorter term. This will result in increased monthly mortgage repayments.
Your lender will consider your parents’ future earning potential – if they are likely to retire and have a lower income during the mortgage term, the lender will take this into account as part of their affordability check process and your parents are likely to have to prove their post-retirement income in the form of pensions and any other savings or investments.
It is not a problem if your parents have already retired when you apply for a joint mortgage. It can even make things simpler for the lender to review, as they will already be seeing your parents’ post-retirement income and expenditure patterns on their bank statements.
A gifted deposit can be a simple and easy way for your parents to help you to buy your home. The terms of a gifted deposit mean that your parents have to sign a waiver confirming that there is no obligation for the money to be paid back.
Another option would be for your parents to lend you the money to help with the deposit and other house buying expenses. It’s worth nothing that a mortgage lender would include this loan in your affordability assessment, which could affect how much you can borrow.
In this scenario, your parents have no legal ownership of your property, but they are liable to cover your repayments if you default. The fact that a charge is placed on your parents’ (the guarantors’) house, means that their house as well as your house could be at risk of repossession if they or you can’t make the repayments.
If neither you nor your parents have enough funds for a deposit, a guarantor mortgage can be an attractive option as some guarantor products allow you to borrow 100% of the property value, needing no deposit at all.
With this type of mortgage, parents offset their savings against their child’s mortgage. This therefore reduces the amount of interest you have to pay on your mortgage.
The parents’ savings are locked in until roughly 25-30% of the mortgage has been paid off, although it may be possible to make withdrawals before then.
This can be a useful option for your parents to help you financially without them giving their money away forever.
We have a team of helpful and friendly mortgage advisers who have a lot of experience in helping clients with these kinds of mortgages.
They will listen to your needs and make sure they are fully up to speed on your and your parents’ financial and lifestyle circumstances, using their experience and knowledge of the mortgage marketplace to help to find the most suitable mortgage product for you.
Our expert mortgage advisers are here to guide you through the mortgage process, every step of the way. You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.