14:52 PM, 16th July 2014, About 7 years ago
There comes a time for all parents to think “When are they going to leave home?” There also comes a time when all offspring think “When could I leave home?” and “Will bank of mum and dad help me?”
The obvious answer for the Buy to Let Portfolio owner is “I’ll buy them a property of their own with a BTL mortgage”. It’s quite a surprise to many landlords when they find out that they can’t let their sons or daughters live in one of their own mortgaged properties, without breaking the terms of the mortgage offer they signed. This situation has become all the more prevalent since the recent MMR (Mortgage Market Review) changes came into effect, with many lenders withdrawing from the Regulated Buy to Let market.
So, what can be done to assist family members onto the first rung of the property ladder? Considering many parents want to assist their children, surprisingly few lenders offer schemes to help. Guarantor schemes tend to be available to offspring who show some signs of being able to afford the mortgage on their own within a few years. This might be applicable to trainee Vets, Doctors or Solicitors, for example, with a defined, sustainable (and lucrative) career path ahead of them.
You might wish to become a joint purchaser, but the lender needs to know that you will not be living there. This will limit the number of lenders who will be willing to lend quite considerably, as it is a usual condition that the mortgage is being granted for the joint benefit of both applicants. There may also be consequential costs, such as CGT and IHT, because the property will be a joint asset.
There are lenders who have grasped this thorny issue though. One lender will allow a parent to appear on the mortgage, (thereby benefiting from the use of their income) but ownership of the property will appear as one person at the Land Registry (the son or daughter). A minimum of 10% deposit will be required. The person not appearing on the mortgage will be required to take independent legal advice.
Another lender will offer a 100% Parental Assisted mortgage, with 80% being secured on the purchased property and a maximum of a 25% charge over the parental property, subject to a maximum of 70% being secured on the value of the parent’s property, including their current residential mortgage. The same lender also offers a 95% mortgage on the same terms, but they allow the son or daughter to rent a room in the house under the “Rent a Room” scheme. This allows for an income of £4,250 per year rental income to be used to assist in the affordability of the mortgage. More than one room may be rented, but only one can be counted in the affordability calculations. Any rent received in excess of £4,250pa is taxable.
With all of these schemes, parental income must be sufficiently high enough to be able to cover all mortgage commitments, so that means their own residential plus any guarantor commitments that they might enter into on behalf of their children. Furthermore, guarantor commitments may harm the parent’s prospects if they need to raise additional finance on their own home.
If you would like to talk through any of the options mentioned above, or any alternative mortgage ideas, please complete the form below.
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