Treat family mortgages with care

Child learning to ride a bike © Getty images
If he falls over, it could cost you dear

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

Clearly, these are complex financial products. If it is something you are considering, you need to make sure that you and your child know exactly what you’re getting into, and you should consider taking independent financial advice. You should also be aware that the market for these products is quite small as they’re not especially popular, says Nick Morrey of mortgage broker John Charcol.

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.