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

The Sunday Telegraph - Money & Business - - Front page -

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 Large­mort­, 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 Large­mort­ 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’

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