How to help your children secure their first mortgage?

Getting on the property ladder is undoubtedly a challenge for many people, no matter what their age. It can be challenging or seemingly impossible for first-time buyers to buy a house without parents or grandparents' support and financial assistance. Helping your child purchase their first home is something that many parents choose to do to help them smooth and support the path to homeownership and independence while they are alive to see the enjoyment it can bring.

Why do they need help?

Property prices often mean adult children need a huge deposit towards purchasing their first home. Many lenders expect hefty deposits or unrealistically large salaries. It can take years to save or afford a house on an average wage, even when living with parents whilst saving. Fleeing the nest can seem impossible, and parents often wish to do more than assist with living expenses or provide a cash lump sum for the deposit. It is possible to make a more significant contribution and provide mortgage help as a longer-term commitment that can be valuable when you have no lump sum available.

In helping your child secure a mortgage, you are investing in their future and ensuring that they can take the first steps towards homeownership long before you have to worry about inheritances and legacies.

What are my options?

There are generally two routes that you can take, and which is best suited to you and your child's situation depends on individual circumstances. Of course, whichever route you choose, you will see your finances and assets come under scrutiny by lenders, and some lenders may be more flexible to your situation than others. For this reason, securing specialist broker services can be invaluable to help you understand all that is involved for both you and your child.

Joint mortgage or guarantor?

There are some pretty important differences and implications to either acting as a mortgage guarantor or being named as a joint borrower with your child for mortgage purposes. Here's a quick guide to help identify the key differences:

Guarantor mortgage 

Depending on your financial situation, you may still be required to provide a deposit to obtain this type of mortgage in much the same way as a traditional mortgage. In most instances where a deposit is required, it will be necessary to use your property assets, savings, or equity to cover the deposit amount. However, this may not be needed in some exceptional cases, and it is entirely at the lender's discretion based on financial situation and overall wealth. 

For a guarantor mortgage, your child will be responsible for making mortgage repayments but you have greater responsibility for payment as guarantor than they do. You will become liable for missing payments and pursued for outstanding amounts alongside your child. Of course, you will need to factor in your child's ability to meet the regular payments and what will happen if they no longer can meet repayments. Are you prepared to sell their home or step in and cover payments until they become financially stable again? Being clear on how far you can or will go is essential before committing.

Joint mortgage 

A joint mortgage is different in as much as you and your child are both named on the mortgage and the property deeds. You are both equally liable to pay, and you both have a share in the property. There are implications for ongoing decisions regarding every aspect of the property and ownership. Before entering into such an agreement, you should discuss how things will proceed should one party wish to change the arrangement. Perhaps one may need or want to sell in the future or make changes that impact future value, such as extensions or how assets are split when one cannot pay mortgage payments at any point during joint ownership.

Joint mortgages can provide a way to play a more long-term role in helping your child purchase their first home and play a flexible part in supporting them as they increase income or where there is uncertainty over their finances. For this reason, it always pays to seek expert help from brokers who can clearly explain all the scenarios and situations you may face, as this could easily be a 25-year commitment you are both making. Don't forget you need the consent of all parties to a mortgage and property to be able to sell, so you want to start off with complete understanding and relationship guidelines if you are to make a success of it.

Risks

Of course, whilst these are your two primary options, we also need to mention risk. Whether you choose to take out a joint mortgage or act as a guarantor for your child's mortgage, you will be held responsible along with them if repayments are not made. Where your home or other assets have been used to secure lending, you could lose your home or any assets used as security, so it is essential to understand your liability and commitment fully.

Understanding the initial costs, such as stamp duty, is as important as understanding any potential future liabilities, such as losing your job, needing to claim benefit support, or being forced to sell your home and going into long term care. There may also be financial implications to consider such as a liability as a second home owner to stamp duty, which can occur with a joint mortgage. You may also incur capital gains tax on the sale of a second home should you sell another property whilst a joint mortgage holder with your child. 

Expectations

As important as understanding risks is the need to set expectations that you want your child to fulfil and ensure they know the limits and what to expect from your support. While some parents are happy to provide ongoing support, others will want to set expectations on their children to take over responsibility at a point in the future. Of course, how you agree these is a personal matter. The point is that they must be clear, fully understood and accepted by everyone to avoid family fallouts and relationship breakdown if you are to reach the happy outcome that your help is hoping to achieve.