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!