Treat family mortgages with care

There is a product for most situations, says Sarah Moore, but make sure you know what you're getting into.

936-bike-ride-634

If he falls over, it could cost you dear

Peter Cade

There is a product for most situations, but make sure you know what you're getting into.

If you want to help your child buy a house but you can't or would rather not hand over a cash deposit as a gift, there are some mortgage products designed to help. Broadly, these involve you offering either a sum of money or a share of your house as temporary collateral, allowing them to access better deals. As you might expect, these are not deals to be entered into lightly.

With what are often known as "family-offset mortgages", parents or grandparents can put savings into an account linked to the child's mortgage. The lender will then take this amount off the total loan the child pays interest on, thereby reducing their loan-to-value ratio and their monthly interest payments.

The balance is not actually used to repay the mortgage; it "sits alongside" as a provisional overpayment, says campaign group HomeOwners Alliance. Lloyds and Barclays are two of the biggest names that offer this type of mortgage.

Typically, this money must stay in the account until your child has paid enough to reduce their loan-to-value ratio to a level more acceptable to the lender often 75% to 80%. But although you should eventually get all your money back, you shouldn't consider this account a normal savings account. Depending on the lender, you may not be able to access the money while it's being used to offset the mortgage, and you may not receive any interest on it. Moreover, if your child fails to make the repayments on their mortgage the lender could opt to extend the period for which the money is locked away or even draw on it to cover missed payments.

With a "guarantor mortgage", as you might expect, you act as guarantor for your child (or grandchild). These differ from offset mortgages, in that under normal circumstances you would have to offer your own house as collateral on your child's mortgage. Note that you would probably need to hold a certain equity stake in your property, with 25% a standard minimum requirement.

As with offset mortgages, the charge should be removed from your house once your child's loan-to-value ratio has declined to a satisfactory level.Buckinghamshire Building Society, for instance, offers a guarantor mortgage where parents or grandparents can use up to 60% of the value of their house as security against their child's mortgage, with a three-year fixed-rate deal at 3.89%.

With guarantor mortgages, should your child consistently fail to meet mortgage payments, you could in the worst-case scenario see your property repossessed in order to repay the lender. That is hardly a recipe for familial harmony.

Scant competition keeps rates high

As a result, there is little competition and the rates will be higher than those available on standard mortgages. If at all possible, it would probably make more financial sense over the long run for your child to keep on saving until they are able to put up a larger deposit on their own and can therefore access better rates.

Recommended

UK inflation is at a 30-year high and it hasn’t peaked yet
Inflation

UK inflation is at a 30-year high and it hasn’t peaked yet

UK inflation has hit 5.4% - its highest in 30 years. And it could be heading higher. John Stepek explains what it means for you and your money.
19 Jan 2022
How to save money when getting a divorce
Personal finance

How to save money when getting a divorce

If you're thinking of getting a divorce, waiting for the new laws in the next tax year could ensure a difficult process becomes a lot cheaper.
18 Jan 2022
Amazon halts plans to ban UK Visa credit card payments
Personal finance

Amazon halts plans to ban UK Visa credit card payments

Amazon has said that it is to shelve its proposed ban on UK customers making payments with Visa credit cards.
17 Jan 2022
Cladding crisis: what new proposals for mean for housebuilders and leaseholders
Property

Cladding crisis: what new proposals for mean for housebuilders and leaseholders

The government is seeking an extra £4bn from house developers to fix the UK’s cladding crisis. Saloni Sardana explains how the new proposals affect bo…
17 Jan 2022

Most Popular

Ask for a pay rise – everyone else is
Inflation

Ask for a pay rise – everyone else is

As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why yo…
17 Jan 2022
Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Interest rates might rise faster than expected – what does that mean for your money?
Global Economy

Interest rates might rise faster than expected – what does that mean for your money?

The idea that the US Federal Reserve could raise interest rates much earlier than anticipated has upset the markets. John Stepek explains why, and wha…
6 Jan 2022