Paul McGerrigan is CEO of Loan.co.uk
At a time where the proportion of first-time buyers leaning on the Bank of Mum and Dad is at an all time high how are parents meeting the pressure to provide a safe and secure future for their offspring?
Analysis for the Social Mobility Commission out yesterday suggests that more than one in three of homebuyers in England depend on money from their family with this figure expected to jump to every two in five homebuyers by the early 2020s. Given that housing represents by far the largest source of family wealth its unsurprising that parents are turning to this source to unlock finances.
First-time buyers must get together an average of £23,000 to get onto the property ladder, official government figures suggest. That provides a pretty hefty figure for any family to find. At Loan.co.uk we have coined the term ‘Mums’ Mortgages to discuss this uplift in parents taking out second mortgages and bridging loans to help get their children into their first properties, What, after all, could be more natural than parents helping their children to buy a first home?
So how are Mums and Dads doing this? Some parents could remortgage to release equity in their home, while those who don’t want to switch mortgage deals could get a loan secured on their home instead. We are also seeing borrowers turning to specialist finance where age and circumstance may make remortgages unfavourable.
In a recent case Loan.co.uk recently completed a £30k second charge mortgage to provide the funds as a gift to cover their daughter’s deposit and moving costs to buy her first home. Together with the lender, Loan.co.uk reviewed the sustainability of payments, and due to the strength of the customer it was agreed that the term could be extended well into retirement . The product attracted no ERC’s and gave the customers the ability to overpay when they choose to meaning that the family could avoid paying too much in interest.
What’s the alternative?
There are alternatives of course – the government’s Help to Buy equity loan scheme, which enables buyers to purchase homes with deposits of only 5%, has partly offset the need to rely on family help — but the Bank of Mum and Dad is still helping nearly four times the number of buyers aided by Help to Buy.
Parents realise that they have a critical role in assisting their children to buy their first home with their offspring’s affordability the number one concern. Going forward it is likely that it will only be better-off young people and those who have parents who have already accumulated wealth through property who will retain a degree of buoyancy without radical changes to the housing market.
Measures to encourage the recycling of housing wealth between generations however would help to make home ownership more accessible. These could include extra support for older people downsizing. In one case Loan.co.uk was able to raise the £170k needed to fund the first phase of development for a new build on an existing plot for the client’s children, securing a bridging loan on the client’s main residence over a 12 month term after which the young couple could achieve their dreams of owning their own home, and finance the property independently.
As a retired couple with pensions as income, the clients’ age and income type meant that a remortgage was unfavourable. At a rate of 0.49% PCM, the bridging solution was the cheapest way to fund the family’s project, falling far below the cost of specialist developer products.
Despite having to use alternative income streams – such as relying on a ‘Mum’s Mortgage’ through the use of a bridging loan – today’s first time buyers and parents are demonstrating innovation and determination to achieve their home ownership goals.
All of these products are more complicated than standard mortgages, however, which means it is especially important to take impartial advice. For those thinking of raising money by releasing equity in their properties it’s important to explore all options.