The intergenerational mortgage market grows

Michael Lloyd

July 29, 2019

The intergenerational mortgage market has grown significantly and now offers some of the most competitive interest rates, financial information business Defaqto has found. 

Intergenerational mortgages are where one person, usually a parent or relative, offers a guarantee to help a borrower get a mortgage.

There are 28 intergenerational mortgage products available on the market today; 13 providers now offer some form of security deposit mortgage, compared to eight providers two years ago.

Katie Brain, insight analyst at Defaqto, said: “With property prices so high, some young people are having to turn to family in order to get their first home.

“Not many people have the cash to put down a deposit for a relative’s home and security deposit mortgages can be a good alternative for them.

“The security provided via collateral charge or linked savings deposit only has to be committed for a fairly short period of time, typically three to five years, this can be released once the lender is satisfied that the borrower is able to keep up with the mortgage repayments.

“No security deposit mortgage is without risk and anyone who is considering helping out a borrower by providing security for the mortgage should get legal advice to ensure they fully understand what they are committing too.

“With traditional guarantor mortgages, the guarantor will be credit checked and their income taken into account for the first time buyer’s mortgage and it will need to cover the total loan amount.

“It’s important that borrowers read and compare the terms and conditions of these products because they do vary.”

Traditionally ‘guarantor’ mortgages have been the most popular; this is where the parent or person guaranteeing the mortgage promises to pay back the loan if the borrower cannot.

However, ‘security deposit’ mortgages available offer the parent or guarantor a less risky way to help the borrower afford a home and, in some cases, profit from it too.

With a security deposit mortgage, the friend or family member helping, known as the helper, only guarantees the deposit or a set amount and is not liable for the whole mortgage.

For example, they could guarantee £20,000 for a 10% deposit on a property worth £200,000. If the borrower does not keep up the mortgage repayments and the debt is called in, the family member is only liable for the £20,000 deposit and not the remaining £180,000 loan.

There are three types of security deposit mortgage available on the market: collateral charge, linked savings account and offset savings account.

A collateral charge is where the helper gives a charge over some of the value of their home to provide security for the mortgage.

For example, they could guarantee £20,000 against the value of their own home, without having to pay anything.

A linked savings deposit is where the helper has savings equivalent to the value of the deposit, for example, £20,000 and is willing to tie these up as security for the mortgage.

The helper would deposit their savings with the mortgage lender and would still receive interest on the deposit for a fixed period at the start of the mortgage, typically three to five years.

In addition, offset savings deposit are similar to linked savings deposit mortgages, except the interest earned on the savings is used to offset the mortgage interest.

The helper would receive no interest on their cash and the borrower would benefit from a lower interest rate.

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