In 2001, 568,200 first time buyer mortgages were granted. In 2010 this had dropped to 199,200. The average deposit for a first timer in 2001 was £6,320 – this year it’s £26,000. Is it any wonder then that the majority of young people cannot get a foot on the housing ladder?
Some mortgage lending institutions have stepped in to help. Aldermore for example announced a 100% contractor mortgage recently, but in order to take advantage of the deal, first timers need a family member to guarantee the loan. Bath Building Society and National Counties have similar deals, although they both require a small 5% deposit.
These deals could appeal to parents who want to help their offspring buy a property but don’t have large sums of spare cash sitting around in a savings account. To qualify as a guarantor, you need home equity of at least 25% which then acts as collateral against the mortgage and can be called in if the buyer defaults on repayments.
As long as the mortgage repayments are kept up to date, the parent has nothing to pay although having the charge on the property could prove detrimental if parents are moving home or want a remortgage.
The Aldermore deal sounds appealing but with house prices still decreasing, there is a danger that the first time buyer will quickly sink into negative equity. Aldermore’s rate of 6.84% is also significantly higher than the majority of other deals.
National Counties is charging a fixed rate of 4.99% until November 2013 and the Bath Building Society deal is a three year fix at 5.29%.
Parents who are considering helping their child through one of these schemes should first check when they will be released from their obligation. With Aldermore, the maximum term for a guarantor is ten years. With other lenders it is often when the mortgage is less than 75% of the value of the property, and if property prices continue to go down, this could mean a long wait.
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