Relative finance

As lending remains tight, first time buyers struggling to wrap their fingers around the bottom rung of the property ladder are turning to that very personal of financial institutions, the Bank of Mum and Dad. Polly Coldwell reports...

House prices are starting to touch bottom, affordability has increased and sales volumes are on the up. But while banks have started to add first time buyer (FTB) products to their mortgage portfolios, the best deals are still out of reach for most would-be buyers.
Meanwhile, the Bank of England base rate is still hovering at an all-time low of 0.5%, and parents with money in savings are earning negligible interest.

Nervous of investing in a shaky stock market, parents are now looking to property as a viable way to shore up equity for the future. But they're not looking at property for themselves; they're giving their kids a leg up on to the ladder.

'Assisted' first time buyers accounted for almost half of buyers under 30 towards the end of last year, according to the Council of Mortgage Lenders. And, according to research carried out by Savills estate agency, parts of London, as well as desirable university towns such as Bristol and Cambridge, have seen a huge increase in property purchases that are funded in part by buyers' parents.

As Director of Residential Research at Savills estate agency, Lucian Cook, explains: "Parents have the equity which their children do not and are increasingly using that equity to unlock mortgages for their children." Ray Boulger of John Charcol mortgage advisers, adds: "Parents recognise that providing their son or daughter with a sizeable deposit is often a good way of utilising their savings."

Experts predict house prices to fall a further few percentage points before bottoming out, but property values have already fallen more than 20% since their high in June 2007. For parents after a long-term investment, rather than a quick fix, it's not a bad time to get out the chequebook.

But if you are in the fortunate position of having a parent or family member willing to inflate your armbands as you take the plunge, which is the best way to go about it?

Deposit
For those with wealthy, generous parents, such as Katie Overend's, it's easy. "I was given a chunk of money from my mum and dad for my first house, which was £46,000, last year," she says. The 27-year-old invested £30,000 of that into a two bedroom property in Burley-in-Wharfdale that she bought for £175,000. "It was a fabulous little cottage and a little old lady wanted to get a quick sale because her partner had died. It needed a lot of work doing, which was great as my partner was a builder and developer." Katie's parents don't expect her to pay them back, and she's already gone on to co-buy a second property with her mum, using the remaining £14,000. She acknowledges that she's "a lucky, lucky girl."
Unfortunately, first timers like Katie are few and far between. But given the current climate of crunching credit, any donation from parents towards a deposit can prove a lifeline. A couple of lenders have introduced 90% loan-to-value (LTV) mortgages for first timers over the last couple of months, but so many strings have been attached - exorbitant interest rates, hefty booking fees, and lengthy tie-ins - that they're not worth it for most. Increasing the size of your deposit, even by a few thousand pounds, could result in you qualifying for a better rate and lower repayments.

In the case of Charlotte Oliver, 20, a £1,000 birthday present from her parents proved the tipping point into home ownership. Charlotte was looking at a shared ownership development in Swindon, and decided to buy a 30% share in a flat for £34,000. But while she'd saved most of the deposit needed to secure the mortgage, she fell just short. "I was devastated when I realised I didn't have enough money," she recalls. "Luckily they'd saved up money for me for when I turned 21, so a grand was taken out of that." She got the keys to her two bedroom flat in March.

Of course, parents can lend, rather than gift, money for a deposit, as Mike Campbell's did. The 25-year-old management consultant wanted to buy in London, but couldn't afford to on his own. His parents offered to lend him £72,500 towards a £290,000 west London duplex flat. "It really helped me out and I'm now paying them back just like I would a mortgage provider," he says gratefully.

Family offset mortgage
For parents who wish to help their offspring but want to keep control of the purse strings, family offset mortgages are an option to consider. While they won't actually get you on to the ladder, they can lighten the load considerably once you're
on it.

An offset mortgage allows you to offset your savings against your loan, reducing your interest payments and shortening the term of your mortgage. If you have a £200,000 mortgage for example, and £15,000 in savings, you only pay interest on a balance of £185,000. The drawback is that you cease to earn interest on the savings, but you do still have access to that money whenever you want. (Bear in mind that if you withdraw cash, the balance of your mortgage will increase by that amount, pushing up your interest payments.)

A family offset mortgage works in much the same way, but in this case your mortgage is linked to the savings of up to two family members or friends. Again, they won't earn interest on their savings, but it's a great way for them to help you out without risking their capital. They still have access to their savings, and for their security, you don't.
Yorkshire Building Society's Offset Plus mortgage is currently the only product on the market and offers a three-year fixed offset at 5.89% with a booking fee of £495. Open to those with a 15% deposit, it's more expensive than YBS' excellent three-year fixed rate at 5.29% with a fee of £495, but with the added benefit of offsetting, it's proving popular - twice as many people took out the mortgage in March compared with the same month last year.

Lloyds TSB's 95% LTV mortgage
There's also help at hand for parent's who'd rather give their kids a helping hand on to the ladder rather than support once they're on. If your parents have savings that they're happy not to access for three years, Lend a Hand, Lloyds TSB's tailormade 95% LTV product, is worth investigating.

Buyers only need to put down a 5% deposit, so long as family or friends are prepared to put a further 20% into a Lloyds account, held under legal charge for 42 months. A three-year fixed-rate at 4.39% with a fee of £995, it's a much more competitive deal than the few other 95% LTV deals around at the moment. Clydesdale Bank and Yorkshire Bank for example, both offer three-year fixed-rates at 6.99%. Parents also earn 3.5% interest on their savings - very reasonable in the current climate.

The only real drawback is that the savings are only released from legal charge once the mortgage has dropped to 90% LTV (through repayments or an increase in the property's value), and this could take longer than three years. The risk of this however, needs to be offset against the nature of the deal. As Stephen Noakes, Commercial Director of mortgages at Lloyds Banking Group says, "The legal charge on the parents' saving means we can offset the risk of lending at this level to offer a realistic and affordable option for first time buyers."

Guarantor mortgage
For parents who are high earners but perhaps don't have huge sums of money squirrelled away in savings, going guarantor is a viable way for parents to help offspring leap on to the ladder. Guarantor mortgages enable you to borrow more than you'd be able to if only your salary was taken into account, because your parents' income is factored in as well.
Nationwide are offering a competitive three-year fixed-rate at 5.83% plus a fee of £745 to those with a 15% deposit. In order to qualify your parents must be able to demonstrate that their income is sufficient to cover any existing mortgages of their own, as well as yours. After all, if you can't make payments, ma or pa will have to instead.
Melanie Bien, director of leading independent mortgage broker Savills Private Finance, comments: "Savills have seen a significant increase in applicants whose parents are acting as guarantors. Lenders don't want to take on any additional risk in these difficult market conditions because of fear of negative equity and borrowers defaulting on their loans. By having a parent as guarantor, the lender effectively passes any risk over to the parent: if the child defaults on their mortgage payments then the parent
is liable."

Bien also advises, "don't overstretch yourself - you will be paying the mortgage on your income, not your parents'. Parents should also ensure they seek legal advice so that they know exactly what they are getting themselves into."

To help or not to help?
Bernard Clarke of the Council of Mortgage Lenders advises, "Parents have to decide for themselves whether it's a good time to help out their children. But they should understand that helping buy a home may tie up their capital for some years, and they probably shouldn't do so unless they can make commitment over that period of time."

Whether it's a £500 loan or a £50,000 gift, parental help in any financial guise is not to be sniffed at. It could mean the difference between paying off your landlord's mortgage, or your own.