First time buyers are being squeezed from two sides. Lenders are tightening their criteria in response to rising interest rates, making affordability assessments tougher and the amounts available lower. Meanwhile, support from the Government is reducing. Help To Buy is now closed, and the Government’s 95% mortgage guarantee scheme, launched in April 2021, comes to an end on 31st December.
As a result, more and more parents and grandparents are stepping forward to help our young aspiring homeowners take their first step on the property ladder. In some cases, they are using their savings to help their children with a deposit, but increasingly older homeowners are taking a different approach: a strategic use of property. The over 55s, who have enjoyed decades of rapid growth in property values, are sitting on £800 billion of property equity in the UK*.
Read on to see how it works in practice.
A typical scenario
Let’s say you have a daughter or granddaughter who is 30 years old and is looking to buy her first home at £500,000. As well as paying rent for a few years, she has saved up £25,000, enough for a 5% deposit. She has a good job and feels she can comfortably afford to pay around £2,500 per month for a mortgage.
She would like to secure a fixed rate for the next five years to provide stability. The problem is, five year fixed rates for a 95% mortgage are currently around 6%, meaning she’ll pay about £2,700 per month if she spreads the mortgage term over 35 years, on a capital and interest basis. This is a bit more than she’s comfortable with, but doable at a stretch.
How parents or grandparents can help
Now let’s take the same scenario but after a conversation with her grandparents. They would like to help if they can, but they don’t have cash savings or other liquid assets available.
Let’s imagine they own their house and it’s worth £1,100,000. With a particular kind of mortgage, known as a lifetime mortgage, they could raise £50,000 which they gift to their granddaughter, giving her a welcome helping hand. She can now increase her deposit to 15% and is now borrowing at 5.6% for the same 5 years. Her mortgage payments have reduced to £2,300, below her initial budget, and she can even afford to service some of the interest payments for her grandparents.
What’s more, the grandparents wisely set up a reserve, or drawdown, facility so they have immediate access to further funds, to help her younger siblings in the same way when their time comes in the next few years.
More about lifetime mortgages
Lifetime mortgages are very flexible, allowing partial repayments on the loan of 10% or more without incurring any charges. So if, for example, the granddaughter saw her income increasing and savings accumulating over time, she could pay back the capital her grandparents originally borrowed to help her out.
A lifetime mortgage can have a significant, positive financial impact. More importantly, it allows families to support each other, and older members to feel they’re really making a positive difference to the next generation.
If you would like to find out more about lifetime mortgages or discuss if it may be right for you, please seek advice from a qualified equity release advisor. Our dedicated Later Life Finance team can help. Contact us at laterlife.finance@knightfrankfinance.com
*according to Canada Life