One of the hardest challenges faced when hoping to buy your first property is saving a deposit. You may be lucky enough to have a family member who can help you out with a gifted deposit or act as your guarantor so that you can apply for a 100% mortgage. If that’s not the case, another way they can help you to buy a home is with a family springboard mortgage.
What is a family springboard mortgage?
As its name suggests, this type of mortgage acts as a springboard to help you reach the first rung of the property ladder. It is also known as a family boost mortgage, family mortgage or family deposit mortgage, depending on the lender. Predominantly aimed at helping first-time buyers, some lenders also offer this mortgage to existing homeowners. It applies for properties up to a value of £500,000.
With a family springboard mortgage, your family member pays at least 10% of the property’s value into a savings account that’s linked to your mortgage. This acts as security for the lender and the equivalent of a deposit if you’ve applied for a 100% mortgage. Depending on the lender’s requirements, the savings are held for a specified term, which is usually 5 years. This arrangement allows you to buy a property without having a deposit, gives the lender security via your family member’s savings and provides that person with interest on that sum while it’s held in the account. You need to meet the lender’s criteria to be accepted for the mortgage regardless of your family member’s contribution. Whilst your family member has helped out with the mortgage for your property, they won’t be named on the deeds. This means you will be the sole owner of your new home.
How does it work?
As mentioned above, your family member needs to provide a minimum of 10% of the property’s value. This means if you want to buy a property in Bexleyheath with a value of £250,000, your family member has to pay at least £25,000 into the linked account. The funds will stay there and earn interest until the end of the fixed term. At this point, they’ll be returned to the family member assuming you haven’t missed any mortgage payments. This can be a good option for them as the fixed term is quite short so their money isn’t tied up for too long and they receive interest on it throughout the term. At the same time, this arrangement enables you to buy your first home without having a deposit to put down.
When the term has finished and your family member’s funds have been returned, it’s a good idea to remortgage to a better deal. You will have repaid a chunk of your mortgage by that time and have some equity in your property. This means that you can secure a better rate as the loan-to-value ratio will be lower than when you first applied for a mortgage. Speak with your broker about Welling or Pimlico mortgages and remortgages for impartial advice before you make a decision.
Who can participate?
Lenders allow any family members to help with this type of mortgage. Usually, parents and grandparents contribute the funds. However, lenders also accept funds from aunts and uncles, for example, and some even allow friends to help out. Depending on the lender, one or two family members usually provide the funds. Some lenders allow for more flexibility with various family members contributing funds. Each person providing funds has to have their own account linked to the mortgage. Lenders generally state that the family member must be a homeowner and possibly meet a minimum income requirement. Speak with your broker in Kent, London or Edinburgh for advice on which lender provides the most suitable family springboard mortgage to suit your circumstances.
What happens if you miss your mortgage repayments?
If you are late making your mortgage repayments, your family member’s funds may be held for longer. This can be until such time as your payments have been brought up to date. If you fail to make the payments and the property is repossessed, the funds held in the savings account may be used to pay the mortgage arrears.
The benefits and drawbacks of a family springboard mortgage
Just like any loan, there are pros and cons to consider. With a family springboard mortgage, these affect both you and the person who’s provided the funds.
- As a first-time buyer, this mortgage allows you to buy a property even without a deposit.
- As a homeowner, it enables you to move up the property ladder with help from a family member.
- The funds from the family member are only tied up for a short term.
- Interest is earned on the funds while they’re held in the savings account.
- At the end of the fixed term, you can remortgage to a better deal.
- The rates tend to be higher as there is more risk to the lender with a higher loan-to-value ratio.
- Your family member cannot access their funds while they are held in the account linked to your mortgage.
- If you miss some of your mortgage payments, this can delay when the funds are returned to your family member.
- If you default on your mortgage and the property is repossessed, the funds may be used to pay the outstanding arrears.
Alternatives to consider
There are various ways that you can receive help from your family when buying a property with little or no deposit. These can include a gifted deposit, whereby you are given the deposit as a gift rather than a loan that needs to be repaid. Alternatively, a family member may agree to a guarantor mortgage. This means that they agree to cover your mortgage repayments if you’re unable to make them. A family offset mortgage is another option. For this, a family member puts savings into a fund linked to your offset mortgage. They won’t earn any interest on their savings but you will pay less interest because their savings are offset against your mortgage loan. If you’re not sure which option is best for your circumstances, speak with your broker in Kent, London or Edinburgh for more advice to help you make a decision.