Date:9 November 2011 I Comments: 7 I Views:14,843

A new product that has appeared on the mortgage scene is being called a 100% LTV Family Guarantee Mortgage.

This has been designed for families who wish to help their children get on the property ladder.

As the name suggests, a family member must provide a guarantee and that guarantee must come in the form of security on their property and must cover at least 25% of the child’s new mortgage.

What’s more, the security on the family member’s property must not take the total combined liability of all the secured debt (mortgages, loans etc.) above 75% across both properties.

eg: Parents have house worth £250,000 with a £100,000 mortgage.

75% LTV on parents home would be £187,500

Child wants to buy £120,000 flat.

25%  of flat value = £30,000

A £30,000 charge is placed on the parents property and the child gets a mortgage of £120,000 (provided the child can afford it).

In this example, if the parents mortgage was over £157,500  (75% less £30k security) it would not be possible.

For a small percentage of the population this represents an opportunity for parents without liquid funds available, to help their children onto the property ladder.

The risk is there for the parents because they could be forced to sell their home if the child defaults.

The risk is there for the child because their parents would disown them if they didn’t keep up the payments and as a consequence put the family home at risk.

The risk to the lender is minimal because they could repossess the £120k flat to cover all of the mortgage and they would also be able to go after the security in the parents home.

So although the borrower has a 100% mortgage, 25% of it is covered by security in the guarantor’s property.

The offer is a 3 year fixed at 6.48% (repayment only).

For the few who qualify for this product, it might actually work out cheaper for the parents to dip into their equity at a lower rate and gift the deposit to their child. The only drawback then is the parents would have to make the repayments on the money they raised – or try to get money out of their offspring!

Guarantees can come from parents, step parents or grandparents.

Independent advice could help determine the most appropriate solution!

Category: Mortgages

Comments

  1. This Family Guarantee Mortgage could be a really good idea. It is important that new initiatives are introduced to fit with the current economic situation.

  2. Professor Stiglitz, 2001 Nobel Prize winning economist, accepted to participate this week in a private meeting with a group of people from the Faculty of Business and Economics of Universidade da Coruña and I had the immense pleasure to be one of them. We asked him about the Euro crisis, market fundamentalism, public banking, energy and renewable technologies… You can read a summary of our conversation at http://www.dpeon.com/index.php/english/8-prof-stiglitz-in-a-coruna.html

  3. Nathan

    That sounds like one risky strategy. This is guaranteed to have been put in purely for the children that default and leave the lenders with massive profits and property gains!

    I’m 21 and even though I’m working full time and saving a significant amount of money each month, a mortgage just looks way out of my reach in this economic climate.

    In regards to this new strategy, I would never consider putting my parents through that, it’s something that could tear a family apart and even if my parents wanted to, I just couldn’t bring myself to do it. Could you imagine if you lost your job, couldn’t get back into work and they wouldn’t agree to a payment break.

    Not only would you have the stress of trying to find somewhere else to live, whilst trying to find a new job, but you’d also have to worry about where your parents are going to live.

    Too high of a risk for just a mortgage. I’d rather spend all of my wages on lottery tickets and scratch cards than waste it doing this, you’ve probably got more chance of winning than paying that mortgage off.

  4. As a mortgage broker, when i heard about this i was thinking great. Something to benefit the FTB potential clients i have on my books.

    Its great and its ideal for some people, but its a minority. Its great for people with parents who are comfortable. But with house prices dropping quite significantly in some areas the equity people had may not exist anymore.

    In my opinion its for people with parents in good jobs, not for the average person. However, its a start and with stamp duty coming back in 2012 for FTB’s every little helps with trying to get people on to the property ladder.

  5. Coming from an equity release and mortgage broking perspective, we’ve seen moderate interest in 100% mortgages, with a degree of caution being excerised by borrowers as well as lenders.
    There’s a little while to go before we feel the full confidence of the market is back.

  6. As another mortgage broker I feel reserved towards these schemes. These schemes come and go and although on face value they appear to be a good idea, the terms and conditions are usually highly prohibitive and combined with a high rate of interest.