During the December festive holidays, many families would have gathered and spent valuable time with parents and grandparents. Often, it’s an opportunity for the older generation to reach out to children/grandchildren to offer financial support at this critical stage in their lives, when they are looking to take that first step onto the property ladder. Despite the rise in cost of living and mortgage interest rates, First Time Buyers (“FTB”) will remain crucial contributors to the housing market, however, they face two key challenges: the level of deposit and affordability.
The government mortgage guarantee scheme (launched in March 2021) was the catalyst for mortgage lenders to restart offering mortgage products with a deposit as low as 5% ie 95% loan to value (LTV) mortgages. Initially the scheme was due to end in December 2022 but has now been extended to end December 2023 (source: HM Treasury). Typically, such high LTV mortgages will have a much higher interest rate and as mortgage interest rates have escalated many borrowers may struggle to meet the strict affordability criteria applied by lenders.
95% LTV Mortgage Example (full APRC Representative)
Detailed below are the monthly payments based on a 25-year mortgage of £475,000 with an initial 5-year fixed term. Max LTV 95% – property value £500,000
| Product 95% LTV | Initial Rate | Follow on SVR | Initial monthly payments | Remaining monthly payments | Lender arrangement fee | Total amount payable* | APRC |
| 5-year fixed, capital & interest | 5.09% | 6.99% | £2,801.77 (61 payments) | £3,262.67 (239 payments) | £0 | £950,947.37 | 6.30% |
*Includes product or application fee, completion fee, mortgage discharge fee and cashback (if applicable)
With initial monthly payments as high as £2,801.77, many borrowers may fail lender affordability requirements depending on their income and other committed expenses.
Your home or property may be repossessed if you do not keep up repayments on a mortgage or any debt secured upon it.
How can parents/grandparents help?
By providing a lump sum gift, parents/grandparents can arm their children/grandchildren with a much higher deposit. The interest rate charged on 75% LTV mortgages can be lower than 95% LTV mortgages thereby reducing the borrowers’ monthly payments, improving affordability and their chances of securing their first mortgage. Additionally, lenders may offer more flexible products e.g. interest only or repayment (capital and interest) which can have a significant impact on monthly cashflow.
75% LTV Mortgage Example (full APRC Representative)
Detailed below are the monthly payments based on a 25-year mortgage of £375,000 with an initial 5-year fixed term. Max LTV 75% – property value £500,000
| Product max LTV ≤ 75% | Initial Rate | Follow on SVR | Initial monthly payments | Remaining monthly payments | Lender arrangement fee | Total amount payable* | APRC |
| 5-year fixed, interest only | 4.49% | 6.29% | £1,406.86 (63 payments) | £1,970.86 (237 payments) | £999 | £932,037.00 | 5.90% |
| 5-year fixed, capital & interest | 4.44% | 6.49% | £2,075.12 (61 payments) | £2,456.07 (239 payments) | £999 | £713,937.05 | 5.80% |
*Includes product or application fee, completion fee, mortgage discharge fee and cashback (if applicable)
Your home or property may be repossessed if you do not keep up repayments on a mortgage or any debt secured upon it.
How can a lifetime mortgage assist?
Many parents/grandparents have significant equity in their homes. Quite often the family home is bequeathed, on death through wills, to the future generation. However, in the current economic climate many borrowers need some financial support sooner.
Lifetime mortgages are available to individuals over the age of 55 and allows homeowners to release some of the equity in their home, during their lifetime, whilst retaining full ownership of their home and avoiding the need to move. Unlike conventional mortgages, there is no need to make monthly payments (although the borrower can do so if they wish). Instead, interest is accrued and this, together with the original sum borrowed is repaid when the last homeowner dies or moves into permanent care. This could impact any future inheritance as the equity in the home will be reduced over time.
The cash released can be gifted to children/grandchildren to help them secure a lower LTV (than 95%) mortgage.
Lifetime Mortgages are applicable for over 55s, may affect state means-tested benefits and could affect the inheritance you may leave.
Get in touch
Alternative structuring solutions, repayment options and mortgage terms are available depending on personal circumstances.
If you wish to discuss your/your client’s personal circumstances with a member of our team, please call us at +44 (0)20 3871 2823 or email at [email protected]