Family Mortgages

Many of us in our young lives have approached the ‘Bank of Mum and Dad’ for cost-free borrowing.

But while not all parents have an endless supply of funds to prop-up their progeny’s lifestyles, family mortgages can help young people get a head-start in life.

Read on to find out how Family Mortgages work and how they can offer a deposit-raising boost for first time home buyers.

What is a Family Mortgage?

A family mortgage is an offset mortgage option. This is where money in a special savings account can be used to reduce the interest owed on a mortgage, whilst keeping these savings accessible to the borrower.

The family mortgage differs slightly, in that the savings can be used to generate a deposit for a family member to put down on their first home. The child/family member cannot access the funds themselves, however, the banks will recognise this as a deposit when it comes to placing offers on properties.

Am I Eligible for a Family Mortgage?

  • If you are a parent/grandparent you must have a significant amount of savings for your younger family members to benefit. These may be suitable for higher-rate taxpayers or employees who regularly receive bonuses in their work.
  • You may have a child or dependents who are approaching the home-buying stage in their lives. They would also need to apply and be accepted for a mortgage, often giving a 5% deposit made up of their own funds. Some lenders may consider lending up to approximately 4.5x of the first-time buyer’s income. The mortgage holder may then have a further 10% deposit to offset within their mortgage-linked account.
  • As the Family Mortgage applicant, you must pass a lender’s credit check and have a high enough income to support the family mortgage.

If you are a first-time buyer with little/no credit history, take a look at our Guarantor Mortgage Guide for tips on how family members can guarantee your mortgage application, as an option.

How are Family Mortgages Repaid?

As family mortgages (AKA Springboard Mortgages, Family Offset etc..) are a type of offset mortgage, they are repaid in the same way. Mortgage terms can run for 20-25 years.

You can choose to repay at a fixed rate, tracker or discounted rate. Whilst you are repaying your mortgage, the money in your savings is used to offset the interest you owe. Funds transferred to a family member’s mortgage are put down as security.

What are the Benefits of Family Mortgages?

  • Help Without ‘Gifting’ – Family mortgages give parents/grandparents the opportunity to help their younger family members get on the housing ladder, without having to give them the actual cash. The savings remain within the offset account.
  • Lower Interest Charges – Whilst the money is in the offset account, the interest payable on the borrower’s loan is offset against these savings. Meaning, lower rates of interest in your monthly mortgage repayments. For the family member who benefits from the mortgage also, the rates offered on family mortgages are often lower than the interest charged on many 95% LTV mortgages.
  • The Money Stays Yours – Whilst the funds are tied up in your family member’s first-time buyer deposit, parents and grandparents cannot access the funds. However, they do remain yours. Once the child/family member has reached 75-80% Loan to Value, the funds can be released back into your possession, with interest earned in that time included.
  • 5% Deposit Needed – With a family offset mortgage, children need only raise around 5% for a deposit to access their parent’s savings and ‘top-up’ their property down payment.
  • Higher Earners Borrow More- High earning borrowers can access more funds for their child/family member’s loan. For example, if you earned £50,000 pa, your child could potentially be approved for a mortgage of 5x their annual income. Whereas, someone who earned under £45,000 pa may only be able to secure their child’s loan for 4.5x their child’s annual income.
  • Your Mortgage Unaffected – If you are helping your family member with your offset facility, the funds remain separate to your own mortgage. This means that the child/family member may not be named or liable for your mortgage repayments.

Let’s Look at a Family Mortgage Example:

Beryl earns £38,000 pa in her job and has a child she wants to help onto the housing ladder. As a sales manager, she often collects commission and has opened a family offset mortgage to use the commission to bring down her mortgage interest, as well as help her son.

Beryl’s son, David was approved for a mortgage, using a 10% deposit from his mother’s offset account and 5% of his own money. David now pays an interest rate of 2.75%, which is a great deal if you compare the average rates of a 95% LTV mortgage around 3.8% (at the time of writing).

What are the Pitfalls of Family Mortgages?

  • Money Tied-in – Once the funds are transferred to the family member’s mortgage, the mortgage borrower cannot access the funds for a certain length of time (around three years). If you are a saver, you must be happy for these funds to be ‘frozen.’
  • Not for New Builds – Some lenders will not consider first time buyers or family members seeking to purchase a new build property with family offset mortgage funds.
  • Remortgaging Hold-Ups – If you are receiving help through a family mortgage, you may be tied into a mortgage rate for a fixed period, say 3-5 years. Early repayment penalties will very likely be applied if you wish to exit the rate you’re on before this time has elapsed.
  • More Expensive Mortgage Type- We have more information in our Guide to Mortgage Types, but offset mortgages, specifically, tend to be priced slightly higher than other mortgages. It is worth noting that for an offset mortgage product to be benefitting you effectively, it is recommended that you put at least 10% of your home’s value, as savings, into your offset account.

What are the Alternatives to a Family Mortgage?

  • Joint Mortgages – If you are a first-time buyer looking to raise your deposit, joining with another (or up to four people) can help you secure a mortgage and property. Read our Guide to Joint Mortgages, for more information.
  • Guarantor Mortgages – If you are a parent looking to help your child secure their first mortgage, you can look at guarantor mortgages, as a means of guaranteeing a loan for customers who may not have built-up a strong enough credit file on their own.
  • Help to Buy – Rather than withdrawing funds from the Bank of Mum and Dad, there are other government schemes designed to give first-time buyers a helping hand.

Whether you’re a parent or first-time buyer, getting advice from an independent mortgage broker can help you track down the lowest and best deal for your needs. Get in touch for a free, no-obligation quote.

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