In the wake of the Chancellor’s introduction of a 95% mortgage guarantee scheme for homebuyers purchasing a property worth up to £600,000, David Forsdyke, Later Life Finance expert at Knight Frank Finance, points out that parents and grandparents can make a real difference when it comes to the younger generation buying above that threshold.

The majority of property wealth in the UK is held by the over 55s, who have enjoyed decades of rapid growth in property values. However the same house price growth has made it difficult for the young to get a foot on the property ladder, especially in the prime areas of London.

As part of the Budget, the Chancellor announced that 95% mortgages will become widely available thanks to a government guarantee. This is great news, and will no doubt help many. However, the 95% mortgages being launched by the major lenders may make this an expensive option for many buyers.

• Can parents and grandparents help?

Let’s say you have a daughter or granddaughter who is 30 years old and is looking to buy her first home at £400,000. As well as paying rent for a few years, she has saved up £20,000, enough for a 5% deposit. She has a good job which allows her to comfortably afford around £1,500 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 being launched at around 4%*, meaning she’ll pay about £1,700 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.

• Consider another way

Now let’s take the same scenario but after a conversation with the family. You would like to help if you can, but perhaps you don’t have significant savings available, or your assets are tied up in other things. Let’s imagine you own your house and it’s worth £1,100,000. You have no debts and you are financially comfortable with a good income. Using a Lifetime Mortgage fixed below 3%* for life, you could raise £60,000 which you gift to your daughter or granddaughter, giving her a welcome helping hand. You can even set up a reserve facility to help her younger siblings in the same way when their time comes.

Your daughter or granddaughter now has £80,000 and a 20% deposit as a result of her savings and your generous gift. Taking out an 80% mortgage is going to be considerably cheaper; fixed at around 2.5%* for five years, this would lower the cost of her mortgage to around £1,150 per month on a capital and interest basis, again over 35 years. She offers to use the remaining £350 of her monthly £1,500 budget to pay some or all of the interest on your new mortgage so you don’t have to let the interest roll up, or worry about paying it yourself. Interest on a £60,000 Lifetime Mortgage borrowed at 3% is only £150 per month, so she’s paying less than her original budget. If things keep going well, she could be lucky enough to see her income rising, her savings accumulating, and she may well find she can pay back the capital you borrowed for her over the next 10 years, as most Lifetime Mortgage lenders now allow overpayments of at least 10% each year without incurring any penalties.

This simple example shows that releasing equity through a Lifetime Mortgage can not only help create ‘Generation Buy’, but can reduce the overall costs involved.

• How we protect you

If this has got you thinking about raising money to gift to younger family members, it is important to carefully consider the long term implications, and the impact on other areas of your finances. A Lifetime Mortgage cannot be bought direct from a lender. Because it is a form of Equity Release, it comes with a thick layer of consumer protection from both the Financial Conduct Authority and the Equity Release Council. This protection includes the need to take advice from appropriately qualified advisers. You can speak to our expert advisers at Knight Frank Finance. We follow a comprehensive advice process, which will look at all the advantages and disadvantages, as well as exploring all the options and alternatives.

You should always make sure you get a detailed explanation of how the mortgage works. 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 estate.

Discussions about the future are also a part of the process, to make sure you have thought about what you might need if, for example, your health deteriorates and you need to cover the cost of care.

Here at Knight Frank Finance, we are not tied to any providers. We will research and find the most suitable products from the whole mortgage market for you, and we can also find the 95% mortgages for your children and grandchildren.

David runs the Later Life Finance team at Knight Frank Finance and is a recognised expert in this field. If you would like to talk to David or a member of his team please get in touch by email david.forsdyke@knightfrankfinance.com or by calling 01483 947764.