Mortgage lenders have now recognised how difficult it can be for young people to get on the property ladder. In response, they’ve developed a variety of mortgage products to help. These allow parents to provide additional assistance to help their children buy their first homes. They typically involve putting their house or savings up as collateral, or by being a part of the mortgage application.
One popular family-oriented mortgage product is the joint mortgage with parents. This product enables parents to help their children borrow more on their mortgage. It’s like a mortgage with a partner, but there are key differences that you’ll need to bear in mind. Read on to find out more.
What Is a Joint Mortgage with Parents?
A joint mortgage with parents – also known as a parent child joint mortgage - is when you apply for a mortgage and include either one or both of your parents on the application. All people listed on the form will be assessed for their eligibility and credit history and will jointly be responsible for the monthly payments. If one applicant fails to make a payment, it’ll be up to the other party to pay.
All the applicants will be named on the title deeds and will therefore some ownership over the property. The details of this joint ownership will be outlined in the mortgage agreement. While some mortgage lenders are more cautious when it comes to joint mortgages with parents, if their eligibility criteria are met, you should be able to get a Decision in Principle.
Joint mortgages enable parents to help their children get on the property ladder and acquire their first home by increasing the amount the child is able borrow, since lenders take all parties’ earnings into account on the application.
Lenders will consider many thing when assessing your parents as part the application process – such as any monthly mortgage and interest payments your parents may already be paying, the potential costs of running 2 households, their ages and more. You should note that you may not qualify for the first-time buyer Stamp Duty exemption and may even have to pay the Stamp Duty second home surcharge if your parents already own a property.
Joint Tenants vs Tenants in Common
If you're planning to take out a joint mortgage with your parents, you’ll need to agree on how the ownership of the property is legally defined. There are 2 options.
The first option is to be joint tenants. In this case, all the tenants jointly own the whole property. The remaining tenants will inherit it if the other party dies. Joint tenants also benefit from an equal share of any profit if the property is sold. Typically, joint tenants are either married or in a long term relationship.
The second option is to be tenants in common, where each party owns an equal or different share of the property. If one tenant dies, ownership doesn’t transfer automatically to the other – it’s a matter to be determined in their will. This option tends to be more appropriate if you’re buying with your parents, but ultimately, it’s your choice which way to go.
Before deciding, it's recommended that you get professional advice from an expert to consider the options. If you do decide to get a joint mortgage with your parents as tenants in common, you should also consider setting up a deed of trust to specify the share of the property per tenant. This will help ensure there are no misunderstandings or disputes in the future.
Is a Joint Mortgage with Parents Recommended?
While a joint mortgage with your parents may seem like the boost you need to finally own your own home, you should also assess the potential complications and risks. Single applicant mortgages are more straightforward to process and have fewer potential issues.
With joint mortgages, both parties are responsible for the monthly repayments. If you cannot keep up with the repayments, the mortgage provider will expect your parents to pay and this could cause tension in the family and risk repossession of the property if the repayments aren’t met.
What Are the Drawbacks of Having a Joint Mortgage with Parents?
A joint mortgage with your parents requires trust, good communication and understanding within the family. You'll have to discuss and agree on ownership terms and when you might want to sell the property. If there’s any history of disagreements or even conflict, you might want to reconsider. Concerns to bear in mind include issues in the following areas.
- Age cap: there’s usually an age limit on borrowing which can be as low as 65 and as high as 85. If your parents are going to hit the age cap during the term of the mortgage, you’ll have to shorten the mortgage, which will mean higher monthly payments
- Tax: first-time buyers don’t have to pay Stamp Duty when paying £300,000 or less for a property. However, if your parents have owned a house previously, you won’t be exempt. If your parents still own a house, you’ll face having to pay the second home surcharge of 3% on top of the standard Stamp Duty rate. You also may be liable for paying Capital Gains Tax if you sell the property for a profit
- Financial risks: with a joint mortgage, your credit reports are linked until the loan is repaid in full. If one party has a poor credit score, it could reduce the other party’s chances of getting finance in the future. Also, if neither party can meet the repayments and your parents have their own property, their house may be at risk of repossession, along with the property you're buying
- Lender income requirements: if your parents are close to retiring, this may pose an issue in terms of minimum income requirements imposed by the lender. Either you'll have to reduce the mortgage term, or your parents will have to show they have sufficient retirement income
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What Alternatives to a Joint Mortgage with Parents Are There?
There are various other options available to you if your parents want to help you get a head start on owning a home. Learn more below.
Mortgage Deposit Gift from Parents or Parent Loan
If your parents have sufficient savings or other investments they can cash in, you might first ask them to consider a gifted deposit. This requires the transfer of funds from the parents to the child which is used to cover part of the deposit. A gifted deposit means there is no requirement to repay the money. Your parents might be asked to sign a waiver to guarantee this.
Another option is that your parents lend you money to help with the deposit. While no interest may be required on this loan, the lender will consider the repayment terms when making their affordability assessment and determining the maximum mortgage size.
A gifted - and in some circumstances a borrowed - deposit can be a suitable alternative to a joint mortgage with parents because, the more you can contribute in deposit, the lower your LTV and the less you’ll need to borrow on your mortgage - which means it’ll be more affordable if you’re only one applicant and/or on a lower income.
Parent Guarantor Mortgage and Joint Borrower Sole Proprietor
Guarantor mortgages are rare these days. They’ve largely been replaced by a similar mortgage arrangement called joint borrower sole proprietor.
Unlike the joint mortgage option, your parents are not added to the title deeds with a guarantor mortgage. However, they’re required to cover the monthly repayments should you not be able to do so. Also, either their home or their savings is as security, which puts them at financial risk if they can't meet the mortgage payments either.
Joint Borrower Sole Proprietor
Joint borrower sole proprietor mortgages allow relatives to help the borrower to apply for a larger loan by including their income as part of the mortgage application, without being included on the title deeds.
Joint borrower sole proprietor is a great – and sometimes more suitable – alternative to a normal joint mortgage with parents as it allows you to borrow more without your parent(s) having claim to the property.
The parent is deemed a full borrower which means you and your parent are equally responsible for the mortgage and receive the same updates from the lender.
In contrast, the outdated guarantor mortgage simply requires the guarantor to take over monthly mortgage repayments if the borrower cannot – it doesn’t boost how much you can borrow.
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