First-time-buyers shut out of mortgage market can turn to family

David Forsdyke, our Later Life Finance expert, explains how grandparents could be the lifeline that first time buyers need right now.

Mainstream mortgage lenders have temporarily withdrawn from higher loan-to-value lending ahead of the wind down of government support schemes in the autumn. Mortgage products above 85% have become much rarer, making life more difficult for first-time-buyers and others with only a small deposit.

This might sound all too familiar. However, you do have options.

The same house price growth that has made it so difficult for the young to get a foot on the property ladder has concentrated a great deal of housing wealth among those aged 55 and over. So it might be worth having a conversation with your grandparents.

A helping hand from grandma and grandad

Let’s say you are 25 years old and looking to buy your first home at £500,000. You’ve saved £50,000 so can put down a 10% deposit, and your income is healthy so you know you can afford to pay around £1500 per month.

You’d like to lock in to a fixed rate for the next 5 years so you have some stability. The problem is, if you can find a 90% mortgage, you will at best be paying an interest rate of around 3%* fixed for 5 years. This means if you spread your mortgage term over 35 years you will pay around £1730 per month for your mortgage on a capital and interest basis, or close to £1125 interest only.

Now let’s take the same scenario but after a conversation with your grandparents. They are in their 70s and live in an unencumbered house worth £900,000. Using a lifetime mortgage fixed below 2.5%* for life, they could raise £50,000 to provide a helping hand.

You’ve now got a 20% deposit, and an 80% mortgage will be considerably cheaper, below 2%*, which would lower the cost to around £1320 per month on a capital and interest basis, or circa £667 interest only. You could use the saving to pay the interest on your grandparents' mortgage, around £100 per month, so there’s no cost to them. You could even pay back the capital they’ve borrowed gradually over the next 10 years, as most lifetime mortgage lenders now allow overpayments of at least 10% each year without incurring any penalties.

Things to consider

There are of course lots of things other than cost and interest rate that you and your grandparents must consider, but this simple example shows that grandparents can not only help with the purchase, but can reduce the overall costs involved. If your grandparents are thinking of taking out a lifetime mortgage, here’s a list of the key things they’ll need to know;

• A lifetime mortgage cannot be bought direct from a lender
• The Regulator (the FCA) requires that such products be recommended by a professionally qualified Equity Release adviser. This means you will go through a careful advice process to make sure it is suitable and appropriate
• The Equity Release Council, who are the trade body for this market, also set certain requirements which both lenders and advisers must meet if they are members. All of this provides a reassuring level of consumer protection around the whole transaction. If money is gifted to children or grandchildren, you may also want to seek advice from a tax specialist (in case of any IHT implications) and Wills and Estate Planning experts
• It is really important your grandparents understand the advantages and disadvantages before you go ahead. For example, a lifetime mortgage allows interest to roll up. So unless you choose to pay the interest for them, the mortgage will gradually get bigger over time and this may reduce the value of your grandparents' estate
• It is really important to think about future needs such as care, and to discuss these with an adviser

If your grandparents are thinking about equity release, or you would like our help in starting the conversation with them, speak to a member of our Later Life Finance team. All later life advisers are fully qualified and we have access to a wide range of products tailored for older homeowners. You can contact us or visit our Borrowing Into Retirement pages.

*all interest rates quoted are indicative only and may not be suitable for you or your grandparents. At the time of writing this article, More 2 Life were offering a ‘Flexi Super Lite’ Lifetime Mortgage with a fixed rate of 2.38% monthly (2.41% annual equivalent rate), and Accord were offering a 90% 5 year fixed rate at 2.99% for First Time Buyers. The choice of interest rate and product terms will depend on your / your grandparents circumstances, the value of the properties involved and the amount of the mortgage. Before you or your grandparents make a mortgage application, we will carry out a full review to establish needs and preferences, and discuss all the pros and cons. If you meet the criteria, and wish to go ahead, we will give advice and make a recommendation to you.