With the reduced rates for Stamp Duty Land Tax continuing until 31st March 2020 (Source: Government website), it would seem that now is the perfect time for First Time Buyers to get on the property ladder. It has been widely reported that the increase in activity seen via the Estate Agency market is a direct result of this relaxation of Stamp Duty rules.
This creates a bit of a conundrum for any would be property owner because the lender market is pretty barren when it comes to high Loan To Value requirements. First Time Buyers tend to have a smaller deposit, 5%-10%, and so how are they managing to obtain mortgage funding?
A relatively new concept to the residential mortgage world is the use of Cross-Charging. This method allows for the “Bank of Mum & Dad” to use their property to be taken as security, should it be possible. This is in addition to the property being purchased and therefore acts as a replacement for a deposit. WHAT? 100% lending? Yes, that is exactly what you just read. An example of this method is as described below, and the names are obviously fictitious: -
Helen’s income meant that she could borrow £200k to buy her first property. She had been saving for her deposit but found that she needed part of her savings to cover her moving and legal costs. In order to enable her to borrow 100% of the purchase price of the house, and then use her savings for such costs, she approached her father, Bill. He was able to grant the lender permission to secure a charge against his property, which gave the lender the equivalent of 25% of the value of the property Helen was buying. The lender was then able to grant Helen 100% mortgage funding by using Bill’s property as the additional security as she was able to afford the mortgage in her own right.
This modern-day method of assistance for First Time Buyers is a move away from the method of Bank of Mum & Dad providing the deposit under gifting rules, which generally means that Mum & Dad have to wave goodbye to their hard-earned cash.
Other possible solutions could be: -
- Sole Proprietor, Joint Mortgage. This method is for the First Time Buyer who has the deposit but may be falling short on affordability (i.e. their income is just not enough to afford the level of mortgage required). A parent or blood relative can become a joint applicant to boost the income for affordability purposes only (Not expected to reside in the property being purchased) but not be named on the deed and so not have any legal ownership of the property. In days gone by, this would have been known as standing Guarantor and so this is a modern twist on that solution. It’s important to note that because the 2nd applicant (guarantor) will not have any ownership in the property but will become responsible for the mortgage repayments, Independent Legal Advice is required.
- Hypothecated Funds. This is a method whereby the Bank of Mum & Dad merely block funds for a set period of time with the lender just in case their child/children default. Hypothecation simply means that the lender takes a charge over the cash being held on deposit and the donors have no to the funds until the lender removes the charge. Incidentally, whilst the funds are being ring-fenced, they do attract interest. This is often preferable to gifting as the donor will, in time, receive their funds back unless default has occurred.
Products such as these detailed in this article are being developed daily and the mortgage market is always evolving. Charles Derby Mortgage Bureau are committed to keeping abreast of market developments in order to provide the very best solutions for our clients and so should any of the above schemes sound like something you need, then don’t hesitate to get in touch. Our advisers are up to speed with market developments and will be able to guide you through the maze that is the First Time Buyer market.