Using Property as Collateral
Posted on 15 August 2016 by R.S.
We are retired and own our home outright. Our son wants to buy his first house but the mortgage lender wants us to put up our house as security. Our son says that would only be for only five years when the value of his house would exceed the mortgage debt. Should we do it?
There are a few lenders now who are prepared to lend up to 100% of the purchase price if the applicant can afford the mortgage and their parents allow a charge to be registered on their own property as additional security for the loan. The terms of the guarantee differ slightly with each lender but what they all amount to is your home could be at risk if your son does not keep up the mortgage payments.
National Counties take an unlimited guarantee over your property to reflect your liability for the whole mortgage debt, whereas with the lender Aldermore the maximum amount of the guarantee will be equal to the amount of the original new home mortgage above 75% of the purchase price or property value (whichever is lower). The liability will be capped and cannot exceed the original agreed amount.
When could your house be at risk?
The guarantee will be called upon if your son defaults on his mortgage payment and so you need to be sure that he is not borrowing above his means and that you are able to step in and make payments for him if he finds himself in a position where he can no longer afford to. You also need to be aware that there is no guarantee that house prices are going to rise and if and when he comes to sell there may be a shortfall on the mortgage which you may become liable for.
You must not agree to put your home up as collateral for his mortgage until you have taken independent legal advice and are comfortable with what you are committing yourselves to.
Answers provided in response to Ask the experts are based on the information provided and do not constitute advice under the Financial Services & Markets Act. They reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.
We recommend you seek professional advice with regard to any of these topics where appropriate.