Mortgage Insight: Family Assistance Mortgages

What are the options for helping the next generation get onto the property ladder?

With the Institute of Fiscal Studies (IFS) reporting that there has been a large decline in home ownership among the middle-income 25 to 34-year-olds, many older relatives will be looking to help their children or grandchildren buy a property.

Fortunately for the older generation, there are different ways in which they might help their younger relatives without necessarily having to hand over large amounts of cash. Our latest article investigates…

Gifting

The most obvious option for parents, grandparents or other relatives is to gift a sum of money to their younger relative towards the deposit for a house purchase, and the majority of mortgage lenders are happy with this. Be prepared, however, for the lender to ask for a letter from the cash donor confirming that the money is a gift (rather than a loan), that it comes from their own resources and that they will have no interest in the property. The lender may well also ask for proof of the origin of the funds gifted, usually in the form of a bank statement.

Joining in on the mortgage: joint borrower sole proprietor

If the younger relative cannot afford to purchase a property with their income alone, another relative may join in on the mortgage but NOT go on the property ownership deeds. This is known as a Joint Borrower Sole Proprietor arrangement. The lender can then also take into account the older relative’s income for affordability purposes. There are other benefits to this for the older relative: they have not had to gift cash; because they are not named on the deeds, there will be no additional stamp duty to pay; and their estate for inheritance tax (IHT) purposes is reduced by the value of the mortgage. Meanwhile, the younger person can purchase a property that was previously out of reach for them and does not lose any Stamp Duty allowance for first time buyers.

Secured deposit account/family security account

Relatives may deposit a sum of money into a Secured Deposit Account which sits alongside the mortgage allowing the younger relative to have the benefit of an interest rate applicable to a lower loan to valuation (LTV) ratio. For example, son or daughter has a 5% deposit and the parents put a further 20% into a Secured Deposit Account. The son or daughter will still have a 95% mortgage, but the interest rate will be that applicable to a 75% mortgage and will be lower as the lender has the security of the additional funds in place. The funds in the SDA are returned to the older relatives either after a certain time period; when the mortgage has been renegotiated such that the SDA is no longer required; or when the mortgage is repaid. So the benefit to the older relatives is that they are loaning funds rather than gifting them and the benefit to the child is that they will be charged a lower interest rate and will therefore pay a lower mortgage payment.

Security through property

If a family member has sufficient equity in their own property (and lenders differ on their requirements), they may permit the lender to place a charge on their own property for a certain amount or percentage of the younger relative’s mortgage. This generally has the same effect as placing funds in a Secured Deposit Account, i.e. it will reduce the interest rate payable and therefore the mortgage payment. The charge will be lifted either after a certain period or when the mortgage is reduced to a certain LTV. The benefits to the older relative(s) in this scenario is that they don’t have to loan or gift funds, and their estate for IHT purposes is reduced by the value of the charge on their property whilst it is in place.

Family offset account

A Family Offset Account allows family members to deposit funds into an offset account connected to the mortgage. Whilst funds are in the offset account, the younger relative pays interest only on the net amount outstanding. For example, if the mortgage is for £100000 and relatives have put £25000 into the offset account, the mortgage-holder(s) will pay interest only on £75000 while the funds are in the offset account. This also reduces the interest rate payable for the younger relative/mortgage-holder. Relatives who have deposited funds in the offset account will have access to their funds at all times and can withdraw them or add to them at any time. However, they won’t usually receive any interest on funds whilst they are being offset. Relatives’ funds are not ‘tied-up’ for any specific time as they would be with a SDA.

It should be noted that some lenders offer combinations of these features and your Partner will help you source the most appropriate mortgage for you and your family.

The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives. Members of the St. James’s Place Partnership in the UK represent St. James’s Place Wealth Management plc, which is authorised and regulated by the Financial Conduct Authority. St. James’s Place Wealth Management plc Registered Office: St. James’s Place House, 1 Tetbury Road, Cirencester, Gloucestershire, GL7 1FP, United Kingdom. Registered in England Number 4113955.