Interesting new product for First Time Buyers via Bank of Mum and Dad

In his seminal preview of the mortgage lending market in 2016, published this week, The new “normal” prospects for 2016, leading economist Rob Thomas addresses the issue of housing affordability.

He notes: “Paradoxically, while the media and politicians have focused on the unaffordability of housing as measured by the house price to earnings ratio, the proportion of the median mortgaged home buyer’s income spent on mortgage interest slumped to its lowest recorded level of 10.0% in 2014, with a further reduction to 8.6% reported by the third quarter of 2015. The figure for first time buyers was 9.7% in November 2015, also an all-time low.

Mr. Thomas adds that “in 2014 mortgage payments for the average first time buyer were lower than the average rent as measured by Your Move, in every region of Britain. This comparison inevitably begs the question that if home ownership is unaffordable, how are people managing to meet their monthly rent?”

The report concludes: “Higher deposit requirements and tighter lending criteria may be factors holding back a significant segment of this cohort and more work should be conducted into why so many potential first time buyers have not yet bought a home despite the potential cost savings from doing so.”

Mark Bogard, Chief Executive of The Family Building Society commented, “Lenders need to innovate and come up with mortgage products that address the needs of the first time buyer.

“Raising a deposit is the main stumbling block for those who can show, by paying their rent on time, that their monthly mortgage repayments are affordable.

“Typically, a first time buyer will now have to find a punishing deposit of more than £25,000, according to the Council of Mortgage Lenders. Our Family Mortgage provides an answer to this challenge”.

The Family Mortgage allows relatives to help the first time buyer onto the property ladder, by depositing savings in an account which will pay interest. The savings are used as a deposit and as security for the mortgage. Or savings can be deposited in a Family Offset Account. While not paying interest to the family member, the buyer only pays interest on the loan minus the savings deposited. The savings are still owned by the family member(s) and which would be released up to 10 years later. The amount in the Offset Account can also provide security for the mortgage, so reducing the interest rate that might otherwise be available. Family members who may be asset rich, but do not have spare cash, can use their equity as security to the lender. All three options can be used in combination.

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