Mortgage market responds to ‘Bank of Mum and Dad’ phenomenon
Research from the Centre for Economics and Business Research think tank predicts that UK parents will contribute as much as £6.5 billion to their children’s property purchases this year, representing more than a quarter of new home purchases.
But if you are looking to support your children with a home purchase, there is more to consider than simply how much of a contribution is affordable. It is also important to consider exactly how you will contribute.
There has been a lot of innovation in the mortgage market in recent years to take account of the bank of mum and dad phenomenon.
These have been triggered in part by the possible Inheritance Tax implications of gifting and the need for any lending to be declared to a mortgage lender, and therefore included in affordability assessments – something that could potentially derail a mortgage application.
Guarantor and joint mortgages are two of the eye-catching products the market has responded with. If acting as a guarantor, parents would be liable for outstanding repayments, should a child not be able to make them. The property would nevertheless be owned by the child.
Joint mortgages, on the other hand, would share ownership between the generations, meaning that parents would be jointly liable for repayments.
In response to this phenomenon, a third type of product has emerged in the marketplace – the savings offset mortgage. These products allow parents to offset their savings against the mortgage, meaning the child can obtain a better rate. The savings are usually held in an account with the lender and can only be accessed after a defined period of time after meeting certain conditions.