Brutal home truths for the Bank of Mum & Dad

HOUSE price growth may finally be slowing but most young people still find themselves priced out of the property market unless they get financial backing from their family. The Bank of Mum & Dad (or Grandma and Grandad) now funds almost half of first-time buyers, handing over £10billion a year in total, according to Savills.

Many are happy to help towards a loved one’s property deposit, but almost a quarter say inflation makes it impossible to gift young buyers the sums required, according to mortgage lender Generation Home.

Co-founder Sophia Guy-white said many are taking another route that does not require paying thousands upfront: “Nearly half of parents say they are willing to co-sign on their child’s mortgage and be responsible for loan repayments alongside them.”

This is called being a mortgage guarantor and can help loved ones get on the property ladder. However, you must go into it with your eyes open because if your child or grandchild defaults on their repayments, they won’t just lose their home.yours could be on the line too.

RESPONSIBILITY

One way of acting as a mortgage guarantor is to use your savings as security for the loan, by offsetting them against the debt, said David Hollingworth, broker at L&C mortgages.a number of products allow you to do this, notably Family Springboard Mortgage from Barclays and Lend a Hand from Lloyds Bank.

Barclays will lend up to 100 per cent of the property’s value but requires a parent or “helper” to place 10 per cent of the purchase price in a savings account as security for five years. This account currently pays a competitive variable rate of 2.50 per cent.

With Lloyds, the family member must put 10 per cent of the purchase price into a three-year fixed term savings account, which currently pays 1.65 per cent.

In both cases, you have to lock your money away for the full term, so before going ahead be sure you won’t need it in that time, Hollingworth said: “If the person you are helping misses monthly payments or defaults on their mortgage, the bank could raid your savings to make good its losses.”

Family Building Society and Generation Home also have deals allowing friends and family to assist first-time buyers, Hollingworth said: “Lenders are becoming more cautious as the property market slows, and are starting to ask for stronger guarantees.”

KNOW RISK

If you don’t have savings to hand but own your home and have spare equity, you could use that as security instead.you will typically be named on the mortgage but won’t have your name on the property title deeds, said Brian Murphy, head of lending at Mortgage Advice Bureau: “The risk is that you are personally liable for making up any shortfall in monthly mortgage payments, should the borrower fall behind.”

Any missed payments are likely to show up on your credit file, making it harder to get finance in future. Even where payments are maintained, the mortgage will be seen as a liability so it could affect your ability to borrow.

If you cannot afford to fund a mortgage payment shortfall, the lender will repossess and sell the property to get its money back.

You will be on the hook to plug any gap between the sale price and outstanding mortgage. If you don’t have cash to hand you could be forced to sell your home to raise funds.

EXIT STRATEGY

Murphy said lenders have different criteria for mortgage guarantors but they must typically be a parent, step-parent, grandparent, or friend: “If using your property as collateral, you must either own your home outright, or have built up sufficient equity to meet the lender’s criteria.”

You must also demonstrate that you have enough income to service the mortgage, on top of your other financial commitments. “Also, you need a good credit score, to show that you are financially reliable,” Murphy added.

Lenders will often insist that you take independent legal advice, separate to the conveyancing solicitor, to understand all your responsibilities

You do not have to be a guarantor for the whole term, Murphy added: “Once the borrower has built up enough equity, you can be removed. It depends on the mortgage so always check.”

Talk to a mortgage broker to guide your choices, he said.

‘Lenders are becoming more cautious as the market slows and are asking for stronger guarantees’

CRUNCH TIME

As the cost-of-living crisis intensifies and interest rates rise, lenders are increasingly calling on mortgage guarantors to repay defaulted loans, says tax advisory firm Mazars.

The Financial Ombudsman Service received 16,500 complaints about guarantor loans last year, up 178 per cent on 5,900 in 2019/20.

Mazars partner Paul Rouse said guarantors have been shocked to find themselves being chased for missed payments. Some claimed they felt pressured into becoming a guarantor, while others were never given a full explanation of the responsibilities.

As prices slow and rates rise, the dangers of becoming a guarantor will increase. It doesn’t mean you shouldn’t help, just make sure you understand what any guarantee could ultimately cost you.