A system for getting your child a property that starts with charging them

Posted on 7 September 2015 by Drew

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A system for getting your child a property that starts with charging them

Originally printed by The Daily Telegraph, 29 August 2015

Do you want to help a child or grandchild on to the property ladder? By lending them money and charging interest on it, you could boost your own income while also saving them thousands of pounds on their mortgage.

Savers are getting paltry returns at the moment thanks to record low interest rates. The average easy-access savings account pays just 0.54pc, while the average five-year fixed-rate bond pays 2.58pc.

Instead of leaving your savings languishing with the banks, you could increase your income and help a family member at the same time.

And most young buyers need the boost. Just over half of the 300,000 first-time buyers in 2014 needed help with their deposit from parents or grandparents, according to the Council of Mortgage Lenders. The proportion rose to almost two-thirds in London, where property prices, and therefore deposits, are much higher.

Some lenders offer “guarantor” mortgages or special schemes that allow relatives to help young buyers with their deposit. But Ray Boulger of mortgage broker John Charcol said there was a way to do it yourself that could be of greater benefit to both parties.

How it works

We’ll look at a first-time buyer who wants to buy a £250,000 property. He has a 5pc deposit (£12,500) and wants a 25-year repayment loan fixed for five years.

The best rate he could get is Tesco Bank’s 4.49pc deal. The loan would cost £1,318 a month and leave a balance of £208,616 owing after the first five years.

Option 1 – 10pc deposit (additional 5pc from family) 

Tesco Bank      

Loan sizeRateMonthly costBalance after five years
£237,5004.49pc£1,318£208,616 

But he could get a better deal if a parent lent him an additional £12,500, raising his deposit to 10pc. He could then secure a five-year fix at a lower rate of 3.49pc from Family Building Society and the monthly repayments would fall to £1,096.

The parent could boost their income by charging, say 3pc, on the £12,500 loan and stipulating that monthly capital and interest payments were to be spread over the 25-year term.

This would add £59 to the borrower’s monthly mortgage costs, bringing the total to £1,155 – £163 less than borrowing from a lender with a 5pc deposit.

The combined balance of the loans at the end of the five-year period would also fall to £206,229 – meaning an extra £2,387 would have been repaid.

Option 2 – 40pc deposit (additional 35pc from family)

Loan sizeRateMonthly CostBalance after 5 years
Family member£12,5003pc£59£10,688
Family Building Society£225,0003.49pc£1,096£195,541
Total£237,500£1,155£206,229

Mortgage rates improve significantly for those with larger deposits, so the more you lend the bigger their savings will be.

If, for example, the parent can boost the deposit to 40pc with an £87,500 loan, the borrower could secure a five-year fix for 2.23pc from NatWest. The monthly repayments to the bank would come to £653, while the repayments to the parent would be £415 (at 3pc interest), giving a total monthly cost of £1,068. This is £250 a month cheaper than a 5pc deposit loan.

It would also mean that an additional £7,522 had been paid off the loans at the end of the five years, leaving £201,094 to pay.

Structuring the loan

Of course, you can structure the loan and repayments, plus interest charged, however you like. Requiring the borrower to repay the capital and a fixed rate of interest over the term of the mortgage is just one option.

“If you need to supplement your income you could ask for interest to be paid on the loan,” Mr Boulger said. “But if you don’t need to, you could lend the cash interest-free, with capital repaid when the house is sold, for example.”

If you do want your child or grandchild to make monthly repayments, this would need to be disclosed to the lender because it would have to be factored into the affordability assessment. However, if the borrower would qualify for a loan with a 5pc deposit, lenders would usually be happy to accept an alternative arrangement that cut the borrowers’ monthly costs.

Other options exist for parents and grandparents. You could lend the money over a different term to the mortgage, or take an equity share in the property rather than interest. “It really is down to what suits you as a family,” Mr Boulger said. “You can choose to set up these arrangements on a very formal basis or keep it informal and flexible.

“You have to accept, though, that the money probably won’t be readily available if you need it down the track, so you have to be happy to tie it up for the long term.”

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