Over the course of the last couple of decades, stagnant wages and rising house prices have left many people unable to afford their own home. Stuck in a cycle of renting, the challenges facing first-time buyers (first-time buyers) trying to save for a deposit as house prices grow further out of reach has been very well documented.
During this time, intergenerational spending and the bank of Mum and Dad have become an important lending force in the mortgage market, helping first-time buyers get a foot on the ladder with gifted deposits, sizeable loans and in some cases, joint mortgages.
According to research conducted by Zoopla in December 2021, nearly two-thirds of parents have helped their children with a deposit for a new home, with 24% stating their children would not have been able to buy a home without their help. Over a third (36%) said they have also helped with mortgage repayments.
With the rising cost of living and rampant inflation set to escalate further, the role that families play in helping each other financially is likely to become even more commonplace. Meaning it’s vital that brokers understand how intergenerational lending works and the different ways in which families can pool finances to help younger members get onto the property ladder.
One the ways in which families can help each other is through a family assist mortgage that allows a family member to guarantee a deposit of up to 20% of the purchase price of a property. This can be done with a cash lump sum which is deposited into a savings account or with a collateral charge against the depositor’s own property, which is then reclaimed when there is enough equity in the new property.
Pooling incomes using a joint borrower sole proprietor mortgage can also help with getting the younger generation onto the property ladder, as it allows up to two owner occupiers and two non-owning borrowers to combine their incomes which can help to increase the individual’s borrowing capacity.
Typically, the mortgage is taken out by a parent and a child, but in some cases, other family members such as grandparents, siblings and aunts and uncles can also help with the property purchase. All borrowers are listed on the mortgage, but only the occupier or occupiers have legal ownership of the property.
With the new academic year approaching, there are also a number of buy-to-let opportunities where family members can club together to help a student buy a house in their new university town.
The student lives in the house and is the property owner, with all contributing family members listed in the mortgage. Any spare rooms can be rented to friends or fellow students and this rental income is then used to cover the cost of the mortgage. This is a great way to help a first-time buyer onto the property ladder and also means they can remain in the house once they graduate.
Of course, family buy-to-let does not just apply to university students and there are also opportunities for families to invest in a property that can also be let to any close family member or relative.
Existing homeowners or mortgage borrowers aged 25 plus with a minimum income of £25,000 can apply for a buy-to-let mortgage with an LTV of up to 80% to purchase a property, and then have a family member move in.
The expected rental income is taken into account when calculating the loan amount and where this will not cover the mortgage ICR test, any surplus income after living expenses and financial commitments are deducted will also be considered.
In the current economic climate, the role of intergenerational lending is likely to become more prominent as parents and grandparents seek to help young family members get a foot on the property ladder. And the intermediary community can play a major role in helping to facilitate such forms of lending.
Ashley Pearson is national business development manager at the Loughborough for Intermediaries
