The cost of living crisis has seen many mortgage lenders tighten their criteria, making it harder for prospective buyers to get onto the property ladder and borrow as much as they could’ve previously.
As such, there has been an increase in the number of UK parents helping their kids buy a house, by lending (or giving) them money for a deposit.
To help those first-time buyers and their parents understand their options, the team at www.onlinemortgageadvisor.co.uk have outlined all the things that you need to consider if you decide to go down the personal loan route, as well as the alternative options available.
The cost of a personal loan is high
Personal loans are available for amounts up to a maximum of £25,000, but you must remember that this isn’t a cheap endeavour. If your parents were to borrow, say, £10,000 with an APR interest rate of 9.9% and repay it over a three-year period, the monthly repayments would be around £320 and they’d have to pay back around £11,528, costing them an eye-watering £1,528 in interest*.
Where did that money come from?
You must also keep in mind that if your parents gift you the deposit (or part of it), or even if they hand you the money beforehand, the banks and other mortgage providers will want to know where that money has come from. Any sudden input of cash, especially if it’s a large sum, will alarm financial lenders in the UK because they’re subject to strict Anti-Money Laundering (AML) regulations. As such, you’ll need to explain where this money has come from, and most mortgage lenders are reluctant to accept deposit money that’s been borrowed. Some lenders will consider a cash contribution from your parents, but there may not be many.
What are the other options available?
Firstly, if your parents own their own home, they could use equity release to help you with your deposit – which is a much more acceptable method from a lender’s point of view. This way, your parents also have more options when it comes to making repayments. If your parents don’t have the cash available to offer a gift or loan, this allows them to use the equity in their current home to give you a lump sum for the deposit. In most cases, the lender will then offer a lower interest rate on the loan.
Otherwise, your parents could remortgage their home with a larger loan, which would allow them to release the equity that’s tied up in their property. While a second charge mortgage is another option that might be a better alternative for your parents, rather than remortgaging – the main benefit of the latter is that the money is available at a much lower interest rate than a personal loan and can be carried over a longer period, which helps to reduce the monthly repayments.
Another possible solution is for your parents to become the guarantors of your mortgage. This involves using your parents’ assets and income as security - they’re also responsible for the loan being repaid, so if you happen to miss a payment, they’ll have to pay it instead. However, these mortgages are particularly hard to come by and often have very high-interest rates.
Lastly, with an offset mortgage, cash savings can be kept in an account that is linked to the mortgage, reducing the amount of interest that has to be paid. Lenders essentially ‘take away’ the amount in the savings account from how much you owe on your mortgage, so you only pay interest on what’s left. This is another way that your parents can help you out if they can’t afford to gift you the money outright as they can access their savings, if necessary, but beware this would subsequently increase your monthly repayments.
In summary, a personal loan is often both expensive and problematic, but there are other options available to you and alternative ways that your parents can help you get onto the property ladder. That being said, it’s important that you and your parents seek guidance from a mortgage advisor about your plans, as they may need to be accounted for in your mortgage application and they’ll also help to decide the best solution for you both.
Article originally published in Property Reporter