Recent research has revealed that the average deposit for a house has leapt from £6,000 in 1990 to currently £66,000. This has been due to increasing house prices and a reduction in mortgage levels. Yet the average household income has only risen by 2.3 times. This means that first time buyers in particular have to save for far longer to buy a home. This is hardly surprising with the average house price 6.3 times the average household income, and the average first time buyer now being thirty five as opposed to twenty three in 1990.
However all is not lost as I see parents of today’s first time buyers who experienced the better entry conditions in the 1990’s riding to the rescue. In many cases parents have either paid off their loan or are very close to doing so, and in some cases have built up savings. These savings have sometimes been built up through their own efforts and sometimes through inheritance. It may be that overall they are reasonably comfortable with perhaps up to 20 years to retire with good pension rights.
These parents’ profiles make them ideal to stand as guarantors. In other words they are prepared to stand as security for their child’s loan, although as always they must be able to pay the loan if necessary. All lenders will calculate how much a first time buyer can borrow, but often they are failing to meet income requirements and the lender is then asking for them to fund a bigger deposit to bridge the gap. Therefore they have to carry on saving as referred to earlier in the article. So parents who are typically not highly committed financially, in theory can support the loan.
The support for the loan can take many different forms. Some lenders want the parents to be able to cover the whole of the loan, and some just look for the guarantee to be able to cover the shortfall on the mortgage payments. Usually the guarantor is only promising to pay the loan on default, but some lenders have more strict terms and insist upon taking a charge on the parents house. This gives the lender a higher level of security and consequently, they are sometimes prepared to lend 95% of the house purchase price. If parents want to support a loan but do not want to offer their house as security they could consider depositing savings that would satisfy the lender with regard to security. So if the house was repossessed the lender could call on the savings to make up the shortfall.
Guarantor mortgages are useful for people who although may not fit lending criteria can actually afford the mortgage payments. Alternatively, they may have an income that is going to increase in the future, or maybe have unsecured loans that when they are paid off will increase affordability. Once the purchaser can prove that their situation has improved and they can fully afford the mortgage, they can apply for the removal of the guarantor and take on full responsibility for the loan. Guarantor mortgages are complex so it is vital to seek independent financial advice should you feel that this option may be right for you. Kieron Bassett Financial Services has two Independent Financial Advisers. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
Kieron Bassett CertPFS
19th September 2011
“