For some tenants, the obstacle to buying a home is not necessarily the monthly mortgage payment. It may be accumulating a large enough deposit, satisfying the lender’s affordability calculation or covering the complete cost of purchasing.
Parents, grandparents and other relatives may be able to help, but “family-assisted mortgage” is an umbrella term rather than one particular product. Assistance could involve a gifted deposit, savings used as security, a guarantee, joint borrowing or joint ownership.
These arrangements create very different responsibilities. The family should establish exactly who will own the property, who will owe the mortgage and what could happen if payments are missed before proceeding.
Begin by identifying the actual problem
The right solution depends on what is preventing the tenant from buying.
A prospective buyer may have sufficient income to support the mortgage but lack the required deposit. Alternatively, the deposit may be available while the applicant’s income does not support the required borrowing.
Family assistance can sometimes help with one of these problems, but it does not automatically solve both. A larger deposit will reduce the required mortgage, although it will not necessarily overcome an affordability shortfall, unsuitable property or adverse credit history.
NetRent can help establish the likely deposit, borrowing range and lender requirements before relatives commit their money or property.
Using a gifted deposit
A gifted deposit is money given to the buyer without any expectation that it will be repaid. The donor does not normally receive ownership of the property or security over it.
The lender and conveyancer will usually require evidence confirming:
- The donor’s identity and relationship to the buyer
- The amount being gifted
- The source of the money
- That repayment is not required
- That the donor will not acquire an interest in the property
- Whether the donor intends to live in the property
Bank statements may be requested to demonstrate how the funds were accumulated and transferred. Moving money through several accounts or introducing unexplained cash can complicate the necessary source-of-funds checks.
If the family expects the money to be repaid, it is not an unconditional gift. The loan must be disclosed because it could affect affordability, lender choice and the legal position. Describing repayable money as a gift could place the mortgage application at risk.
The donor should also consider whether making the gift would leave them with adequate savings for their own retirement, emergencies and future care costs. Legal, tax and estate-planning advice may be appropriate.
Family savings used as security
Some family-assisted products allow a relative to place savings into an account linked to the buyer’s mortgage. The buyer may then be able to purchase with a smaller personal deposit than would otherwise be required.
Unlike a gift, the relative may retain ownership of the savings and receive them back after a specified period, provided the mortgage has been managed according to the product conditions.
However, the money may be unavailable during that period and could be at risk if the borrower fails to maintain the mortgage. The helper must understand:
- How long the savings will be restricted
- Whether interest will be paid
- The circumstances in which money can be retained
- What happens if the property is sold at a loss
- Whether early access is possible
- Whether independent legal advice is required
Product availability and conditions vary, so the arrangement must be assessed using the current lender criteria rather than a general description.
What does a guarantor accept?
A guarantor agrees to become responsible if the borrower does not meet the mortgage obligations. Depending on the product, the guarantee might cover a defined portion of the mortgage or create wider liability.
The lender may assess the guarantor’s income, expenditure, debts, credit history and age. Acting as guarantor could also affect the relative’s ability to obtain other borrowing.
The guarantee should never be treated as a formality. If the buyer cannot pay, the lender may pursue the guarantor and any assets provided as security could be placed at risk. The guarantor should obtain independent legal advice and understand how—and when—the guarantee can end.
Joint borrower, sole proprietor arrangements
A joint borrower, sole proprietor mortgage may allow a relative’s income to be included in the affordability assessment without making that relative a registered owner of the home.
Although only the occupying buyer may appear on the property title, every borrower is normally jointly responsible for the mortgage debt. This can mean that the lender could pursue either borrower for the full payment if the other fails to contribute.
The supporting relative’s age can affect the maximum mortgage term, while their existing commitments may reduce the additional borrowing their income creates. Becoming a joint borrower can also affect their future affordability and estate planning.
There should be a clear plan for eventually removing the supporting relative from the mortgage. This will usually require a new affordability assessment and lender approval; it cannot be assumed that the arrangement will end automatically when the buyer’s income increases.
Buying the property jointly
Another possibility is for the relative and tenant to purchase the property together. In this case, both may be named on the mortgage and legal title.
Joint ownership raises additional questions about:
- The percentage each person owns
- Responsibility for the deposit and mortgage payments
- Whether both parties may occupy the property
- What happens if either person wants to sell
- The effect of death, incapacity or relationship breakdown
- Wills and any declaration of trust
- Property-tax and first-time-buyer consequences
A joint mortgage is a serious financial commitment, not simply a temporary affordability tool. Each party should receive appropriate legal and tax advice before ownership is established.
Buying from a relative at a discount
A family member may offer to sell a property below its market value, with the difference intended to support the purchaser’s deposit.
This is sometimes called a concessionary purchase or gifted-equity transaction. However, lenders do not all calculate the deposit and loan-to-value in the same way. They may investigate the relationship, valuation, existing ownership and reason for the discount.
The buyer should therefore confirm that an appropriate lender will accept the arrangement before relying on the discount as the complete deposit.
Prepare the family-assisted application carefully
The mortgage application must accurately explain where the assistance comes from and what the family member expects in return. Depending on the structure, the lender or solicitor may require bank statements, identification, gift declarations, evidence of income, legal agreements and confirmation of independent advice.
Before selecting an arrangement, the family should answer five questions:
- Is the difficulty the deposit, affordability or both?
- Is the money a genuine gift, a loan or temporary security?
- Who will own the property?
- Who will be liable for the mortgage?
- How will the relative eventually be released from the arrangement?
NetRent Mortgage Solutions works with DNA Financial Solutions to help tenants, first-time buyers and their families understand the available mortgage routes and their different lending requirements.
To discuss a family-assisted mortgage, call 01352 721300 or email mortgages@netrent.co.uk.
NetRent does not provide legal advice. This article represents our general understanding of the landlord mortgage and rental property market and is provided for information only.
Mortgage products, affordability calculations and lender criteria can change. Tax treatment and legal consequences depend on individual circumstances. Appropriate mortgage, legal and tax advice should be obtained before proceeding.