It’s well known that first-time buyers are struggling to get on the property ladder. One of the biggest hurdles is pulling together the deposit needed to secure a mortgage. As a result, it’s not surprising that more aspiring homeowners are turning to parents for financial support.
According to Which?, nearly one in four potential first-time buyers are relying on the Bank of Mum and Dad to fund their mortgage deposit and get on the property ladder. But what if that isn’t an option for you or, as a parent, you’re not in a position to support children with a lump sum? Whether you’re a first-time buyer or a parent that wants to help, there are alternatives to consider.
1. 100% mortgages
Following the 2008 financial crisis, 100% mortgages that meant buyers didn’t need a deposit all but disappeared. However, as the economy improves these types of mortgages are starting to make a reappearance. There isn’t as much choice as there once was, but they could provide a valuable lifeline if saving for a deposit seems impossible.
The prospect of being able to borrow the full amount needed to purchase a house may be appealing for many that are struggling to take that first step. That being said, there are some drawbacks to be aware of. First, there is less competition in the market for a 100% mortgage, this means the level interest you’ll pay is likely to be higher, pushing up your monthly repayments. Secondly, you don’t own any equity in your property initially and it will grow slowly. Should property prices decrease, this means you’re at an increased risk of negative equity, where you owe more than your home is worth.
2. Help to Buy Equity Loan
The Help to Buy Equity Loan scheme was introduced by the government to give first-time buyers a helping hand. You’ll still need a 5% deposit, but the government will then lend you a further 20% (40% in London). As a result, you’ll only need to take a mortgage to cover the remaining 75% of the property’s value. This not only reduces the amount of deposit needed but may increase the value of the property you can afford.
There are some restrictions on when the Help to Buy Equity Loan can be used to consider first:
- It must be used to purchase a new build
- The value of the house must be no more than £600,000
It’s also important to note that you will have to pay back the money the government loans you. For the first five years, no interest is added to the loan, after this point the interest paid will be linked to inflation. It must be paid back after 25 years, or earlier if you sell your home. You must also repay the same percentage of the sale proceeds of the initial equity loan. So, if house prices increase, so too will the value of your loan.
3. Help to Buy and Lifetime ISAs
Both these ISAs (Individual Savings Account) offer a government bonus on your contributions, boosting your efforts to build up a deposit.
You can open a Help to Buy ISA with a maximum deposit of £1,200. From here, you can add up to £200 each month. When you come to buy your first home, you apply for a government bonus, which is 25% of the deposit up to a maximum of £3,000. If you save £12,000, you’ll have a deposit of £15,000 to put down on your first home. Each person can open a Help to Buy ISA, so, if you’re buying a home jointly, there’s an opportunity to receive £6,000 in ‘free cash’.
The Lifetime ISA (LISA) has the potential to offer greater bonuses but comes with more restrictions. To open a LISA, you must be aged between 18 and 39 but can make deposits until you’re 50.
Each year you can place up to £4,000 into a LISA, which will benefit from a 25% government bonus. Open a LISA aged 18, maximising your allowance each year, and you could benefit from £33,000 in bonuses. However, should you make a withdrawal for a purpose other than buying your first home before the age of 60, you’ll face a hefty penalty; losing not only your bonus but some of your own contributions too.
4. Guarantor mortgages
If parents or grandparents don’t have the assets to provide a lump sum deposit but do own their home, a guarantor mortgage could provide another solution for accessing a mortgage without a deposit.
This is where a homeowner takes on some of the risk associated with the mortgage by acting as guarantor. They will typically have to offer their own home as security against the loan, agreeing to cover mortgage payments that are missed. As the lender has additional security against the loan, you’re more likely to be approved for a 100% mortgage, eliminating the need to save up a deposit.
Even if you have a deposit, a guarantor mortgage can be useful. It can mean your chances of your application being accepted are improved and give you access to a better mortgage deal, potentially saving you thousands of pounds over the long term.
5. Family mortgages
A family mortgage may work well for first-time buyers whose loved ones do have a lump sum to act as security against a mortgage but need it at a later date, for example, to fund retirement.
Family mortgages are similar to offset mortgages; your loved one will place savings into an account that’s equivalent to a deposit, usually 10% of the property’s value. These savings will be held as security for either a defined period of time or until you’ve built up equity in your home. If repayments are missed, the money could be held for a longer period of time or used to offset losses.
While it still comes with risks, family mortgages can be attractive for two reasons. Firstly, your loved ones will receive their money back, assuming you keep up with mortgage repayments. Secondly, the savings will typically earn interest, helping it to grow and offset some of the effects of inflation.
If you’re saving for a deposit or are considering using some of your own money to support children or grandchildren, please contact us. We’re here to help give you confidence in the decisions you make.