The mortgages that help parents buy their child a home
‘Camouflage mortgages’ allow parents to give their children a leg up while saving thousands in tax, writes Adam Williams
An increasingly popular breed of mortgages lets parents help children and grandchildren on to the property ladder without being caught by stamp duty surcharges and capital gains tax. The loans, called “joint borrower sole proprietor” mortgages, allow multiple people to be part of a single mortgage application, which means that a parent’s income can be used to boost the amount their child can borrow.
Such loans have been called “camouflage mortgages” as the parent is not named on the property deeds, only the mortgage contract. This means parents are not liable for any stamp duty surcharges and their children can still receive the firsttime buyer stamp duty exemption. Although Barclays has offered such loans for some time, this has traditionally been a market dominated by smaller banks and building societies.
The number of lenders that offer camouflage mortgages has started to grow dramatically: Bank of Ireland, Metro Bank and Newcastle Building Society have all entered the market recently. Tipton & Coseley Building Society has become the latest, unveiling its new range last week.
Mark Harris of SPF Private Clients, a mortgage broker, said: “These mortgages were originally used by partners in law firms who wanted the asset held in sole names but needed both names on the mortgage. More recently they have been used to increase an applicant’s borrowing capacity.”
Parents apply for the mortgage jointly with their child. Having multiple applicants can drastically increase the amount that banks are willing to lend because they consider the incomes of all applicants in their affordability assessments.
A parent has always been able to buy jointly with their child, but taking out a traditional mortgage with both parties named on the deeds would result in a double whammy of stamp duty charges. First, the child would be barred from claiming first-time buyers’ stamp duty relief, potentially worth as much as £5,000. They would also be forced to pay the 3 percentage point stamp duty surcharge on the cost of the property, as their parent would be considered a second homeowner for tax purposes.
Using a camouflage mortgage is a legitimate way to circumvent this tax at a time when the cost of stamp duty has weighed heavily on the property market. Figures released last week showed that HM Revenue & Customs collected £2.3bn in stamp duty between July and September.
Richard Merrett of Largemortgageloans.com, a broker, said the savings could be considerable. “First-time buyers are exempt from stamp duty up to £300,000, meaning that, on a £400,000 property, a first-time buyer will be liable to pay only £5,000,” he said. “However, if parents already own a home and they’re also named on the deeds of their children’s, this home will be termed a second property and that would result in a significant increase in stamp duty. On a £400,000 home the stamp duty would be £22,000.”
Over time, the child can buy out the parents’ stake in the property and, as their own income increases, take out a traditional mortgage on their own.
There are also capital gains tax benefits. A parent who buys with their child in the traditional way would be liable to pay tax if the property increased in value between the purchase and sale. Using a camouflage mortgage also eliminates this potential outlay, as the parent does not legally own a stake in the property.
‘With my father’s help, I could borrow £328,000’
Lisa Brunton, 37, enlisted her father’s help to maximise the amount she could borrow. Miss Brunton had separated from her husband but wished to remain in their London home. However, the income from her job as an operations manager was not enough to remortgage the property solely in her name.
Her father, Andrew, 70, a retired medical professional, agreed to be on the mortgage to help with affordability. His age meant the pool of potential lenders was reduced even further, but Bank of Cyprus UK would lend up to the age of 95 on a joint borrower, sole proprietor basis for a term of 25 years.
“We looked at a variety of options but most ‘normal’ options would have been outside my budget,” Miss Brunton said. “When I originally bought with my ex-husband, there were two salaries on the table so we were able get a traditional mortgage. This time around it’s just me, so my father had to get involved with the mortgage.”
Mr Brunton received separate legal advice as he would have responsibility for the debt but not own the property.
Miss Brunton’s property is valued at £410,000 and she was able to take out a loan for £328,000 with her father via Largemortgageloans.com. The Bank of Cyprus UK deal is fixed at a rate of 2.29pc for five years and she plans to rent out a room so that she can overpay each month. By the end of the five-year term, she hopes to buy out her father’s side of the mortgage.
Couples can also take out a mortgage in this fashion if one of them already owns a property.
There are some drawbacks to structuring a house purchase in this way. While the camouflaged borrower remains hidden from any stamp duty liabilities, they are still legally responsible for making sure the mortgage is repaid on time. The camouflaged borrower is considered “jointly and severally liable” by the lender, meaning that they would be chased for money if the other party ever fell behind with their payments.
Couples could also encounter a problem if they were to separate, as only one would legally own the property, even though the other remained on the hook if payments ever fell behind. Mr Harris warned that any missed payments would have a negative impact on both the borrowers’ credit scores.
Mr Merrett added: “You obviously need a very strong and trusted relationship between the parties involved. Effectively, you’re asking someone to be financially responsible for owning a property that they technically have no legal rights to, as they’re not named on the deeds.”
In the past, parents have been foiled by the upper age limits imposed by lenders. However, these rules have loosened in recent times and, as in the Brunton family’s case, it is possible for such loans to run until a parent is 95, subject to their income in retirement.
Camouflage mortgages are also available to buy-to-let investors and Mr Merrett said couples who were landlords often structured their purchases so that only the lower earner was named on the deeds.
However, this is useful only for unmarried couples. If a couple are married they are deemed to have a financial interest in each other’s assets, so would face the stamp duty surcharge.
‘You need to have a very strong and trusted relationship between the parties’