Keeping it in the family (Intergenerational lending)
Ashley Pearson, National BDM at The Loughborough for Intermediaries
Intergenerational lending and the bank of Mum and Dad have played an important role in the mortgage market over many years, helping vast numbers of first-time buyers (FTBs) to take their first step on to the property ladder by gifting deposits and sizeable loans.
According to figures from Savills, the Bank of Mum and Dad lent or gave away a total of £9 billion in 2022, an increase of almost £4 billion since 2019, with 170,000 (46%) of all FTBs purchasing a home last year doing so with some financial help from their family.
While there will always be parents and grandparents in a position to help their children and grandchildren out financially, regardless of the economic climate, the cost-of-living crisis and continued economic uncertainty is placing significant pressure and financial constraints on more families than ever before. So how might this impact intergenerational lending practices going forward?
Inevitably, the Bank of Mum and Dad will continue to play a key role for FTBs but, in some cases, gifted deposits may no longer be as readily available as they once were. Market forces and hikes in savings rates may result in people holding back on parting so readily with their savings and seeking different ways to support their children with their homeownership aspirations.
There are a number of mortgage products specifically designed to enable family members to use existing wealth or combine borrowing power to purchase a property, without having to part so readily with cash. And it’s here that brokers will play a key role in advising families on the alternative solutions available in the marketplace.
Here at Loughborough Building Society we have a suite of family assist mortgage products specifically aimed at addressing these needs. The range includes a 100% LTV family deposit mortgage which allows borrowers to take out a mortgage for the total value of the property with a minimum and maximum loan amount of £90,000 and £400,000 available up to a term of 40 years.
Another family member (typically parents) then guarantees a deposit of up to 20% of the purchase price by placing a collateral charge against the depositor’s own property or as a cash lump sum into a savings account. Both guarantees are released after seven years, or even sooner, if there is enough equity in the property when it is time to remortgage.
Similarly, our Family Deposit Joint Borrower Sole Proprietor (JBSP) solution is a five-year fixed rate mortgage with a term of up to 40 years that enables a family member to provide a 20% security against their property or as cash held in a deposit guarantee account while also boosting borrowing capacity by using family members’ income for affordability purposes.
In most cases, this will be the borrower’s parents, but other family members such as grandparents, siblings and aunts and uncles can also be listed on the application, although only the occupier or occupiers have legal ownership of the property.
Borrowers can then secure a mortgage for up to 100% of the property’s value as long as it’s worth between £90,000 and £400,000. As with all forms of borrowing, there is an element of risk involved as all parties will be responsible for the mortgage payments, which is why we encourage all family members to seek legal advice before providing a deposit guarantee.
In the current economic climate, both these options present viable funding alternatives for family members who may be reconsidering handing over large sums of money they are unlikely to ever see again, but who are still willing and able to use their assets or income to help their children or grandchildren get onto the property ladder.