Pension pot deposits and price war to help first-time buyers

The Deputy Prime Minister Nick Clegg has indeed unveiled plans to allow individuals to use sizable pension pots as a guarantee to help their children raise a deposit to buy their first home.

The plans are being investigated by the Department for Work and Pensions and the Treasury and would allow parents and even grandparents to draw up to 25 per of their pension pots to secure deposits for first-time buyer mortgages.

In theory, your parents could set aside part or all of their future taxfree cash lump sum entitlement. Say your parents had a pension pot of £40,000 this would allow them to borrow a deposit of £10,000 to help you.

The lump sum element of your parents’ pension becomes the collateral for raising your home loan. It is an alternative option for all to consider but one that shouldn’t be taken lightly. If for any reason you default on your mortgage repayment your parents’ pension lump sum would be lost. Although the rest of the pension wouldn’t be affected it would present your parents with a financial loss that will certainly leave them out of pocket.

All in all, this type of option seems favourable; especially considering saving lump sums of cash is increasingly more difficult. It also helps parents and grandparents that don’t have floating sums of cash to support younger family members.

While the details of the scheme have yet to be finalised the new arrangements could come into effect as soon as 2015 so I’d keep abreast of news on this and keep talking to your independent mortgage adviser.

A: In a word “yes”. Of course, the banks have been incentivised by the Government through the Funding for Lending Scheme to bring these products to the market but it seems the need to offer long-term security and peace of mind to consumers is taking a precedent.

Only the other week Leeds Building Society launched a 10year fixed deal up to 75 per cent of Loan to Value at 4.58 per cent and an 80 per cent deal at 4.79 per cent. Products are available for both purchases and re-mortgages and clients can lock-in value for a decade. For many this will be a compelling deal with the security of a low rate proving irresistible.

Virgin Money has reduced its rates on a number of residential and buy-to-let mortgage products. The lender has lowered its twoyear fixed rate by 0.10 per cent to 2.79 per cent, available up to 60 per cent loan to value with a £995 product fee. Its five-year fixed rate mortgage is now 4.19 per cent, down 0.30 per cent, with the £1,995 product fee option lowered 0.20 per cent to 4.39 per cent. Nat West have responded to HSBC and Santander fixed five-year deals at 2.99 per cent with a 2.95 per cent package over the same period and Barclays, Nationwide and First Direct have cut their rates on fixed and tracker-rate mortgages by up to 0.5 per cent.

Although these deals seem good you have to take into account your personal situation. If you have a fixed monthly budget a fixed repayment mortgage would suit you better than a tracker where rates can go up and down.

In addition you will need to take into account the arrangement charge of fixing your mortgage. Some providers offer low fixed interest rates but make up for this by charging a higher arrangement fee. Similarly you might be offered a higher fixed rate but a more reasonable arrangement charge.

As with any financial decision you should weigh up the pros and cons and take the advice of a professional independent mortgage adviser. The decision you make could leave you out of pocket or locked into a deal you can’t leave until the end of your mortgage term.

Franz Muelthaler is mortgage adviser for Holroyd Miller estate agents, Wakefield, www. holroydmiller.co.uk