Lenders do recognise the difficulties that a first time buyer has to deal with and over time they have developed a range of mortgage products to help them.
These could involve the parent/s putting their house up for security, or by utilising savings, or by formally being part of the mortgage.
A joint mortgage with parents allows children to borrow a higher mortgage amount so they can buy their first home and get on to the property ladder.
What is a joint mortgage with parents?
One way that parents can help their children get on to the property ladder is by being part of their mortgage.
Both parents and children will apply for a mortgage together. This boosts the amount a child can borrow because lenders consider everyone’s income on the application.
The lender will take into account the parents financial situation, including any mortgage and loans they have in their own name.
By having this extra income, the mortgage affordability is improved, so the lender can offer a higher mortgage amount.
The parent becomes a joint borrower, and is jointly liable for repayment of the mortgage debt.
Splitting ownership
Where you have a joint mortgage you will also need to decide on the way that the property is owned.
This should really be agreed before you get to the stage of applying for a mortgage. Owners will be able to benefit from future increases in the property value and will be expected to help financially with maintenance etc.
Below we will explain the basic options available but it’s best to discuss this with your conveyancing solicitor so that the ownership can be set up under their guidance.
There are two ways you can own a property with your parents:
Joint Tenants
When you and your parents opt for Joint Tenants, it means that all of you share an equal stake in the property. This setup ensures that each individual owns an undivided interest in the entire property, so there’s no distinction between your ownership and that of your parents.
If one of you were to pass away, their share automatically goes to the surviving co-owners. It’s a bit like a chain reaction, continuing until only one owner remains, who then becomes the sole owner of the property.
However, there’s something you should be aware of. With Beneficial Joint Tenancy, you don’t have control over who inherits your share of the property. It’s a predetermined process that transfers ownership to the surviving co-owners.
A joint tenancy option would normally be more suited to people who are married or in a long term relationship.
Tenants in Common
Tenants in Common is an alternative way to co-own a property, which provides more flexibility in terms of ownership shares and inheritance:
In this arrangement, co-owners can hold different ownership percentages in the property. For example, you and your parents can choose to have unequal ownership shares based on your contributions or preferences.
Unlike Joint Tenants, there’s no automatic right of survivorship. This means that if one owner passes away, their share of the property doesn’t automatically transfer to the others.
Instead, it becomes part of their estate and is distributed according to their will or the laws of inheritance. This aspect gives you more control over who inherits your share of the property.
Tenants in Common can be suitable when co-owners want to have distinct ownership stakes and have more say in how their share is passed on. Instead of owning the property 50/50, it can be changed to any proportion you want; 80/20, 75/25, 60/40 etc.
This option would be more appropriate if you’re buying with your parents.
Using a Deed of Trust
A Deed of Trust, also known as a Declaration of Trust, is a legally binding document that outlines the ownership structure and financial arrangements between co-owners of a property. It serves as a written agreement that clarifies each party’s rights and responsibilities regarding the property.
If you’re co-owning a property with your parents, a Deed of Trust is optional, but can be incredibly beneficial. Here’s how:
Ownership Shares: The Deed of Trust allows you to specify the exact ownership shares for each co-owner. This means you can determine who owns what percentage of the property, taking into account financial contributions or other factors.
Financial Arrangements: It can detail how ongoing expenses, such as mortgage payments, property maintenance, and bills, will be divided among co-owners. This ensures transparency and helps avoid conflicts in the future.
Sale or Transfer: The document can outline the procedures and conditions under which the property can be sold or transferred. This is particularly important if you or your parents plan to sell your respective shares or if there are changes in ownership.
Dispute Resolution: In the unfortunate event of disagreements or disputes between co-owners, a Deed of Trust can provide a framework for resolving conflicts, potentially avoiding costly legal battles.
Inheritance: It can address what happens to each co-owner’s share of the property in case of their passing, offering clarity on inheritance matters.
In essence, a Deed of Trust acts as a customised agreement that tailors property ownership to your specific needs and circumstances.
It provides legal protection and ensures that everyone involved understands their roles and obligations, which can lead to a smoother co-ownership experience.
Consulting with a solicitor or legal professional is advisable when creating a Deed of Trust to ensure it aligns with your intentions and is legally sound.
A Deed of Trust can apply to both ownership options
Regardless of which co-ownership structure you choose, a Deed of Trust can be drafted to clarify the ownership shares, financial arrangements, responsibilities, and other important aspects of the property co-ownership.
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
Mortgage options
There are a few ways in which parents can help their children to buy a property.
Specifically in terms of the mortgage options there are three possibilities:
- Straightforward joint mortgage
- Guarantor mortgage
- Joint Borrower Sole Proprietor (JBSP) mortgage
Joint mortgage
A joint mortgage with parents, also referred to as a parent-child joint mortgage, involves applying for a standard mortgage with one or both of your parents.
All mortgage applicants are assessed for eligibility and credit history, and they share equal responsibility for the monthly payments. If one party fails to make a payment, the other has to cover it.
Joint mortgages allow parents to assist their children in buying their first home by increasing the borrowing capacity through combined incomes. Lenders assess various factors, including existing mortgage and household costs, ages, and more when evaluating parents as part of the application.
Anyone named on the mortgage will also be on the title deeds and will therefore have some ownership of the property.
Guarantor mortgage
With a guarantor mortgage, you are the sole applicant for the mortgage, but your parents act as guarantors.
They provide a financial guarantee, which means they will cover mortgage repayments if you ever default (stop paying). This option allows you to apply for a mortgage independently, with your parents offering financial support and security.
Having a guarantor provides borrowers with access to guarantor mortgage lenders and a greater choice of mortgage options. This could mean being able to borrow more money or gaining a better rate of interest, some guarantor products offer 100% mortgages, with no deposit needed from you.
When you apply for the mortgage the guarantor will be noted as an additional party to the mortgage, so that the obligations above can be fulfilled. However, they do not own any of your property and will not be mentioned on the deeds to the property.
You will find more useful information in our guide to guarantor mortgages.
Joint Borrower Sole Proprietor (JBSP) mortgage
A Joint Borrower Sole Proprietor Mortgage (otherwise referred to as a JBSP mortgage) is a type of home loan that allows two parties to borrow money together while only one of them is named on the property.
These can be beneficial for people who want to buy a property but don’t have enough money for a deposit or who have bad credit and need someone with good credit to co-sign the loan.
In a JBSP mortgage, you are the sole owner of the property, but both you and your parents are joint applicants for the mortgage. This means you have full ownership of the property, while both generations share the responsibility for mortgage payments. It combines your incomes for the mortgage affordability assessment.
You will find more useful information in our guide to JBSP mortgages.
Alternatives to a joint mortgage
It’s not always feasible, or desirable, to be part of a new mortgage.
Here are some alternative options where a joint mortgage with your parents is not possible.
Gifted deposit
Many parents will want to help their children by giving them money. Parents or close family members can provide some or all of the deposit, this is known as a ‘gifted deposit’.
If this is a likely source of the deposit then you should mention it to your broker at the earliest opportunity as not all lenders are happy with gifted deposits.
The gifted deposit must be a gift without expectation of repayment (they can’t have it back). The lender and your solicitor will need this to be in writing to confirm that all parties are agreeable.
A gifted deposit can be a good alternative to a joint mortgage with parents because, the deposit will lower the loan to value (LTV) percentage and may allow you access to better rates. Also as the mortgage is smaller, the monthly repayments will be more affordable.
You will find more useful information in our guide to deposits.
Family loan
An alternative approach is for your parents to provide financial assistance by lending you the money needed for the deposit. Even though this loan may not accrue interest, the lender will take the repayment terms into account when assessing your affordability and determining the maximum mortgage amount you qualify for.
The loan will be assessed as a debt that needs to be repaid, and may therefore affect how much you can borrow.
This option is not as ‘clean’ as a gifted deposit.
Family offset mortgages
A family offset mortgage, or parent offset mortgage, works by linking your new mortgage with savings from family members.
An Offset Mortgage uses the cash savings to ‘offset’ the interest charged on the mortgage balance. This has the effect of reducing the mortgage interest payable to the lender and so makes your mortgage a little cheaper.
The main benefit of a family offset mortgage is that it enables home-ownership to happen that much sooner. It can fast-track the buyer onto the property market, reducing the usual delay associated with saving up the cash deposit.
For parents, it allows them to help their children buy a home, without having to gift the money to them permanently.
You will find more useful information in our article: “What is a family offset mortgage?“
Family deposit mortgages
A family deposit mortgage is also known as a springboard mortgage.
Like the family offset option above, it allows a family member to use cash savings as part of the mortgage arrangement.
In this case the savings are kept in their own account, rather than being used to offset the main mortgage interest.
You will find more information in our article: What is a family deposit mortgage?
Discounted property sale
Another way of a parent helping their children is to sell them a property at a reduced price.
So they might own an investment property worth 350K but only ask the children to pay them 250K. This children buy the property and instantly have 100K of equity.
This type of deal will need a concessionary purchase mortgage. Lenders that offer these will be able to utilise the discount as a deposit.
With the lender calculating the LTV from the open market value, it’s possible to achieve a 100% mortgage on the purchase price.
You will find more information in our article: What is a concessionary purchase mortgage?
Is getting a mortgage with your parents a good idea?
Having your parents on a joint mortgage might seem a great solution, especially for first time buyers, but mortgages without parents are easier to arrange.
It’s important to remember that most mortgages are set up over 25-30 years, so you will be stuck with them (and vice versa), for some time to come!
Explore all of the options as there may be a more suitable alternative. For example, if your affordability is OK but you don’t have the necessary deposit, maybe ask your parents to gift you money towards the deposit.
Getting a mortgage with a retired parent
It is possible to obtain a joint mortgage with a retired parent. Mortgage lenders evaluate applicants based on income, creditworthiness, and the ability to repay the mortgage.
While retired individuals may not have traditional employment income, they can still be considered for a joint mortgage if they have retirement income from sources like pensions or investments that demonstrate their ability to contribute to the mortgage payments.
You will find more useful information in our guide to Borrowing into retirement.
How a broker can help
There’s a lot to consider when parents want to help their children financially.
But many of the scenarios above are not always available from the high street lenders. And their advisers are unlikely to be experienced enough to explain all of the options and help you decide on the best one.
But an independent mortgage broker can do this.
They can walk you through the different options and help you make a decision that everyone is happy with.
Your broker will then search the mortgage market for a lender that offers what you need.
Let Respect Mortgages help you. We will arrange for an experienced independent mortgage broker to contact you for a no-obligation chat.
Just call us on 0330 030 5050 or pop some details into the form below.
Yes they can. It is preferred that any gifted deposit comes from savings rather than additional debt.
However, parents can use a capital raising remortgage to access their equity and then gift this as cash.
The “Bank of Mum and Dad” can give as much as they feel comfortable with to help you with a property purchase. There’s no strict limit, and it can vary from a small contribution to a more significant amount.
Just keep in mind any potential tax implications and your parents’ own financial situation. It’s a good idea to chat openly with them about how much they’re willing to give and consider getting some legal advice to make sure everything is properly documented.
When one owner of a jointly owned property passes away, the outcome depends on the type of ownership.
In Joint Tenancy, the deceased owner’s share automatically goes to the surviving owner(s).
In Tenants in Common, the deceased owner’s share becomes part of their estate and is distributed according to their will or inheritance laws.
Legal documentation, like a will, can specify how the deceased owner’s share is handled.
The surviving owner(s) may choose to sell the property or take on responsibility for the mortgage payments if applicable.
This is certainly a possibility.
Equity Release Plans
Equity release is a financial option that allows homeowners, including parents, to access the value tied up in their property without selling it. It can be used to provide financial support to children, such as helping with a property purchase or covering other expenses.
Equity release methods include lifetime mortgages and home reversion plans, each with its own terms and considerations. However, it’s essential to carefully weigh the implications, including the impact on your estate and inheritance, and to seek legal and financial advice before proceeding with equity release.
RIO Mortgages
A Retirement Interest-Only (RIO) mortgage is a specific type of mortgage designed for older borrowers, typically those who are retired or nearing retirement age. RIO mortgages have gained popularity as a means for homeowners to release equity or finance property purchases in retirement.
They work on an interest-only basis, with no fixed end date. The capital is typically repaid when specific life events occur, such as the borrower’s death or when they move into long-term care. RIO mortgages can offer security and predictability in retirement, but it’s essential to seek legal and financial advice to fully understand the terms and implications before considering this option.
A joint mortgage with your parents relies on trust, effective communication, and family understanding.
There are several concerns to keep in mind, including:
Financial Risks: Joint mortgages link the credit reports of all co-borrowers until the loan is fully repaid. If one party has a poor credit score, it could negatively affect the other party’s ability to secure future financing. Additionally, if both parties struggle to meet repayments, there’s a risk of repossession not only for the property being purchased but also for your parents’ own property if they have one.
Lender Income Requirements: If your parents are nearing retirement, it may pose challenges related to meeting the lender’s minimum income requirements. This may necessitate adjustments to the mortgage term or a demonstration of sufficient retirement income by your parents.
Ready to explore your options?
If you’re just about to start a new mortgage journey and could use the guiding hand of a professional, don’t hesitate to reach out to a reputable mortgage broker.
An independent mortgage broker can access over 100 lenders on your behalf. They will make the process smoother and more profitable than going it alone.
Keep reading, keep asking questions. The more you know, the better decisions you can make.
