Applying for a Joint Mortgage With Parents

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With ever-rising property prices, we appreciate that getting onto the property ladder can be extremely tough, not least for young professionals living in central cities where housing commands a steep premium.

Increasingly, first-time buyers consider using parental support to purchase their first home.

Demand has led mortgage lenders to introduce several potential mortgage products that make the borrowing process more accessible.

If you are thinking about taking out a joint mortgage with your parents, this guide explains how it works, the main ownership structures, and a few of the alternatives that might be worth a look at.

What is a Joint Mortgage With Parents?

In essence, if you need financial assistance raising a deposit on your dream home or keeping up with the repayments, your family can provide support, either indirectly or through a mortgage product designed to help.

Assuming you are going down the mortgage route (rather than receiving a lump sum or regular contributions), that means:

  • All applicants, including yourself and your parents, will be named on the application.
  • Each individual is assessed for eligibility and affordability as normal.
  • You are all jointly responsible for making the mortgage repayments on time.

This type of product works well for first-time buyers because the lender has a considerable amount of assurance that, if something goes wrong, your parents will step in and ensure the mortgage does not end up in a default position.

We will talk about the benefits and drawbacks later, but you may find this is a viable option if you have been turned down for a mortgage or do not have a high enough annual income to secure a mortgage of the value you need.

How Does a Joint Mortgage With Parents Work?

There are two main ways you can structure a mortgage with your parents:

  • As joint tenants, or
  • Tenants in common

This decision needs to be made early on in the application process since it determines the legal ownership of the property.

Joint Tenancy Mortgages

If you go for a joint tenancy, you and your parents own the property equally. If one person were to pass away, their share automatically passes to the other owners.

Each joint tenant also receives an even share of the profits when you sell the home. Many couples that buy a house together opt for this type of mortgage.

Tenants in Common Mortgages

The second option is to set up a mortgage with parents as tenants in common. That means you can still own an equal share, but it does not necessarily have to be split equally.

If one owner passes away, they can choose how that asset is managed in their will, and it will not automatically pass over to the other joint tenant.

Family mortgages usually go with this structure, but it is entirely up to you and your parents which mortgage product and ownership model best suits your requirements.

We recommend seeking independent advice if you are unsure which type of joint mortgage to apply for.

Depending on your finance agreement and relationship, there are various factors to consider.

How Can Parents Help Children Buy Their First Home?

Joint mortgages shared between parents and a child are a relatively specialist product and might not be something your regular bank offers because lenders have a range of criteria.

They may be cautious about joint mortgages outside of a conventional partnership.

However, several excellent lenders offer a joint mortgage with parents, either as co-applicants or guarantors. Please read on for further information about that second option!

This type of joint mortgage is becoming more and more popular because:

  • First-time buyers or young buyers without a substantial credit history can find it tough to secure mortgage approval.
  • Interest rates may be low, but applicants will normally expect a considerably more affordable rate when incorporating their parents’ income.
  • Deposit requirements start at 5%, but a larger deposit is equally important to reduce the lender’s risk and receive competitive mortgage offers at reasonable rates.
  • Lenders calculate mortgage caps based on a multiple of annual income – an applicant with one salary might find that they do not qualify for a mortgage value sufficient to buy any property, however small, in the immediate area.

Co-signing a joint mortgage is one of several ways parents can support their children and boost their prospects of getting onto the property ladder, lending financial weight and credibility to the application process.

Pros and Cons of Taking Out a Joint Mortgage With Parents

Before you proceed with an application, there are a few potential pitfalls to be aware of and discuss with an experienced property expert to ensure you make informed decisions.

Joint applications can offer distinct advantages, but parents must acknowledge that they are legally liable for the mortgage repayments and will be called upon to cover payments if their child defaults.

Below we will run through some of the potential stumbling blocks.

Joint Mortgage Credit Assessments

If you apply for a joint mortgage with any other person, each individual will be assessed, which means your credit reports will be linked until the mortgage has been fully repaid.

The implication is that if you have a low credit score or any adverse credit history, it could harm the other applicants if they intend to apply for another credit facility – particularly given that a mortgage typically runs for 25 years.

In the worst-case scenario, if the property were repossessed, the lender could repossess a parental property against the home bought jointly to recover their debt.

Taxes and Joint Mortgages

First-time buyers have a higher Stamp Duty threshold – that means you do not need to pay this tax on any home in England, Wales, or Northern Ireland, provided the value falls under £425,000.

Where your parents are homeowners, the exemption does not apply, and you will need to budget for Stamp Duty of:

  • 5% on the value between £250,000 and £925,000.

There is also a second home Stamp Duty to factor in. This charge is 3% in addition to the initial tax and applies to parents purchasing a second property in a joint mortgage with their child.

Capital Gains Tax may also apply when you sell a property classed as a second home.

Mortgage Age Caps

Mortgage lenders usually have an upper age limit, which can be anything from 65 to 80 – although a select few lenders will consider applications up to 95.

The issue is that the cap normally applies to the applicants’ age at the mortgage term-end.

Therefore, if you apply for a mortgage jointly with your parents, and they are aged 70, a lender might reject the application on a 25-year term if their policy does not permit lending to applicants who will be 95 when the mortgage is due to be repaid.

In most cases, the best solution is to reduce the mortgage term and ensure the repayments end before hitting the age cap.

The downside here is that your monthly repayments will increase accordingly.

Please contact Think Plutus if you need any further advice about amending your mortgage term to avoid this issue or would like information about mortgage lenders with more flexible age restrictions.

Learn more: Maximum Age for a Mortgage?

How Do Mortgage Lenders Assess Income on a Joint Mortgage With Parents?

Income requirements are a normal part of a mortgage assessment, as lenders need to run through affordability calculations to ensure they lend responsibly.

If your parents are retired or approaching retirement age, it may mean that:

  • The lender imposes a maximum age limit.
  • They require proof of pension income (including expected retirement age, pension value, and forecast pension payments).
  • Your parents are asked to provide evidence of other income sources.

The lender will be looking for confirmation that your parents will still have the financial means to cover the repayments post-retirement should the need arise.

There is no reason you cannot apply for a joint mortgage with your retired parents, but it helps to be aware of the potential age cap limits and the need to show that their earnings or pension income are high enough to meet affordability requirements.

Lenders will include additional income, such as investment returns or rental property, so you should ensure all revenue is included on the application.

Are There Alternatives to Getting a Joint Mortgage With Your Parents?

As we mentioned earlier, several borrowing solutions and lending products may be preferable to a joint mortgage, depending on the circumstances.

Some of the options include:

  • Joint borrower, sole proprietor mortgages – your parents contribute financially to the deposit and/or mortgage repayments as a joint borrower on your mortgage agreement. However, they are not named on the property deeds and are not legal owners, so you own 100% of the home but with shared financial responsibility.
  • Gifted deposits – parents can gift their child the deposit required to purchase a property through a bank transfer. The deposit funds must be a gift, without any requirement for repayment, and the lender will ask for a waiver by way of confirmation.
  • Family loans – rather than a gift, a parent can lend the funds to a child, either to help with the deposit or contribute towards other purchasing costs. There should not be interest payable, but the mortgage lender will need to know that your funds originate from a family loan.
  • Family offset mortgages – this type of mortgage offsets the parent’s savings, and interest is payable only against the net difference. Savings funds are held for a period, usually, until around 25% or 30% of the mortgage has been repaid.
  • Guarantor mortgages – when a parent acts as a guarantor, they are not a legal owner and will not be named on the deeds. Instead, they guarantee to cover the cost of the repayments if their child falls into default.

On the latter option, the lender places a charge held against the guarantor’s property. If the homeowner defaults and the parent cannot cover the costs, the risk is that their residence may be repossessed.

Guarantor mortgages often make it viable to apply for a high Loan to Value mortgage, up to even 100% of the property value, without a deposit or with a low down payment.

Is a Joint Mortgage the Best Option for Me?

There are many things to consider when choosing whether to take out a mortgage with another family member, not least comparing some of the alternative options to ensure you are selecting the right product that offers the best solution.

Even if you have an excellent relationship, it remains essential to discuss what may happen if either of your financial situations changes and how that might cause tension or economic hardship.

If you have a stable amount of family wealth and feel confident that there is little to no chance of ever calling upon the co-owner to support your mortgage payments, it may be a much more straightforward decision.

Children, as well as parents, should seek impartial guidance.

While it might seem an easy option to accept parental mortgage support, there is an element of independence that may be important to you – in which case a guarantor mortgage might enable you to proceed without the financial reliance.

Whatever your circumstances, Think Plutus can steer you through the product options, advise on the pros and cons, and help you to assess which choices offer a favourable outcome to get your purchase completed.

Please give us a ring at your convenience to arrange a good time to discuss, and we will be happy to sit down with you and your family members to talk it through.

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