As a first-time buyer, applying for a mortgage can be a bit challenging. Your credit score may not be that high, it’s a stretch to reach the minimum income requirements, and the type of house you want may not be available.
But, don’t give up hope. In fact, you have various options that might make it easy for you to secure a good deal, and a joint mortgage with your parents is one way to increase your borrowing power and share the financial burden. Here, the mortgage will likely be known as a joint borrower sole proprietor mortgage, but whatever you call it, the point is you’re receiving some support from a family member to qualify for your property.
If you want a hand up onto the property ladder then our experts can help you explore the ins and outs of a joint mortgage with parents and help you determine if it’s suitable for you. Plus, we’re in touch with specialist lenders who offer these mortgage products.
What Is A Joint Mortgage With Parents?
A joint mortgage with parents is when you apply for a mortgage and involve your parents for financial assistance. That means they will be part of the application, and the mortgage provider will assess all of you for eligibility and credit history.
Of course, as legal contributors, your parents will own part of the house. How much they own depends on the terms of the mortgage agreement.
The biggest selling point of joint mortgages is that all individuals listed in the application are equally responsible for making the monthly payments. So, you’re not in this alone. Mortgage lenders assess income from all the parties and this can help boost your application and increase your chances of mortgage approval.
How Does A Joint Mortgage With Parents Work?
Before you apply for a joint mortgage with your parents, you want to decide what type of mortgage you want. You have two legal options:
- Joint tenancy
- Tenants in common
Both types have their pros and cons. So, talk to your parents and identify the one that works for all parties’ personal and financial circumstances. You should take specialist independent advice from a property solicitor so you are in full possession of all the facts before you make up your mind.
What Is A Joint Tenancy?
Joint tenancy is where all individuals listed in the mortgage application have equal legal ownership of the house. That means all tenants receive equal profit if you decide to sell the house at any point and the property value has increased.
Additionally, if one tenant passes away, their share will automatically go to the other partners.
Tenants in Common
Tenants in common don’t necessarily have an equal share in the ownership of the house. You can agree on how to split the value of the property before applying. If one tenant passes away, their share doesn’t automatically go to the other tenants. They can decide who that share passes to in their will.
This option works best if each individual is contributing different amounts of money so their shares are not equal. If you choose to hold the property as tenants in common, you might want to consider a deed of trust and you’ll definitely need legal advice. A deed of trust defines the role of each party to the mortgage, what their share of ownership is, and how much they will contribute to the mortgage. It helps prevent future misunderstandings and disagreements.
If you don’t know whether to hold the mortgage as joint tenants or tenants in common, contact us for consultation. We’ll consider all the crucial variables and advise on the type that will work best for you.
Does Everyone Listed On The Mortgage Have To Live In The Property?
Well, lender’s criteria usually expect all contributors listed in the mortgage agreement to live in the house. It’s not obligatory, though, especially with mortgages that involve another family member or members. The most important thing for your lender is that the monthly repayments are made on time.
What Are The Advantages Of A Joint Mortgage With Parents?
You can probably tell a joint mortgage with parents has some serious benefits to offer, but why choose it over other options like a guarantor mortgage? Here’s why:
Credit Boost
If you’re a first-time buyer, you may have been living with your parents and your credit score isn’t likely to be that good. Since credit is a key factor in this process, having a low score can hurt your approval chances. However, if your parents have a good credit score, they can improve your application, and it’ll be easier for you to get a good deal.
Financial Security
Look, you can do everything right: Secure a job that pays well, spend your money responsibly, and save as much as you can. You don’t know what the future holds, though.
There might come a time when you’ll have to rely on savings because your circumstances have changed. In that case, your parents can help you cover the mortgage payments until you save enough to get back on your feet.
What Are The Disadvantages Of A Joint Mortgage With Parents?
Despite all the value and security they offer, joint mortgages with parents aren’t perfect. You should know all the disadvantages of a joint mortgage before you apply for one so you can make an informed decision.
Joint Credit Assessment
Mortgage providers will assess the financial status and credit history of all the tenants listed in the mortgage application. That means all your credit reports are connected until you repay the mortgage in full. While that might be beneficial for you, it can hurt the other borrowers.
If you have a low credit score, the other contributors will find it difficult to get approved for financial products in the future and that can be a real hindrance on a 20 or 25-year mortgage term.
Also, if you and your parents fail to meet the mortgage repayments for the house, the lender can repossess one of your parents’ properties alongside your own home, potentially putting them at risk. So, it’s essential to make sure you are financially stable before applying for a joint mortgage with your parents.
Tax Exemption
You probably already know about Stamp Duty. It’s a property tax you have to pay when you buy a house in the UK. The amount of money you pay depends on the property’s price and type. First-time buyers in England, Wales, or Northern Ireland can access concessions on Stamp Duty Land Tax depending on the value of the property.
However, if you’re applying for a joint mortgage with your parents, you will lose that exemption unless your parents are first-time buyers, too. In fact, they’ll have to pay an extra 3% Stamp Duty on top as their involvement in the purchase of your property will be classified as a second home.
Finally, if your property is your parents’ second home, they will be liable for Capital Gains Tax when you decide to sell the house for profit in the future.
Age Cap
Joint mortgages with parents have an upper age limit; most lender income requirements have a cut off point if your parents exceed a specific age. The maximum age depends on the lender. It could be as low as 65 years or as high as 85. Some mortgage providers will even consider 95-year-old homeowners.
Bear in mind that the age cap applies to your parents’ age at the end of the mortgage’s term, not when you apply for the mortgage at the point of property purchase. So, if you have already retired parents, a lender might reject your 25-year-term application if they have a maximum age cap of 95. This is not insurmountable but you might have to reduce your mortgage term to 20 or 15 years and look for a new mortgage deal. This will also increase your monthly repayments.
Income Requirements
Mortgage providers have specific affordability criteria for borrowers to ensure they can repay the mortgage by meeting the mortgage payments every month. This might be easy if you have a full-time job, but could be an issue for your parents if they are retired or due to retire soon.
The lender will look at the combined income of all the people signed to the mortgage as part of standard lending criteria. Your parents will need to prove that their income is sufficient to repay the mortgage.
If your parents are approaching retirement age, the mortgage provider may seek more information on their expected retirement age and the value of their pension pot.
Is A Joint Mortgage With Parents Suitable For You?
There isn’t a definitive answer to that question, as everyone’s circumstances are unique.
As mortgage brokers, we always recommend taking the time to save for the deposit and applying on your own for a mortgage if you can. However, if you need financial support to borrow money, then it is an option to get a joint mortgage with your parents.
What Are The Alternatives?
Gifted Deposit
If you can pay the monthly instalments but can’t save for the deposit, you can always ask your parents for a gifted deposit; that’s usually the most straightforward approach.
Keep in mind that a gifted deposit isn’t a loan. The word “gifted” implies that it doesn’t require repayment and the lender might ask your parents to sign a waiver to confirm that.
Borrowing The Money
Your parents may be prepared to lend you the money for a deposit and other mortgage-related expenses. You won’t have to pay interest on that money however, the lender will still consider this a loan and take its repayment terms into consideration during the affordability assessment.
Guarantor Mortgage
A guarantor mortgage is basically a joint mortgage, but your parents act as guarantors instead of getting involved in the mortgage in a joint ownership capacity. Being a guarantor means they would need to step in if you failed to meet the monthly repayments but they don’t have ownership of the property. A guarantor mortgage is one of the alternative mortgage products for young buyers who don’t want to get a joint mortgage with their parents.
With this type of mortgage, the lender uses your parents’ house as security. So, if you and your parents fail to cover the repayments, their house and the one you’re paying for might get repossessed.
Important note: Some lenders offer 100% LTV mortgages. That means you won’t have to pay for a deposit. However, these mortgages usually require a guarantor. If you’re struggling to save for the deposit, this might be a viable option. However, that mortgage would have higher interest rates.
Family Offset Mortgages
A family offset mortgage can reduce the interest you pay on your mortgage by having your family offset their savings against that property.
So, if you’re looking for a £200,000 mortgage, and your parents put a lump sum of £70,000 in a savings account connected to your mortgage, you’ll only pay interest on the remaining £130,000.
Can Parents Remortgage Their Property For A Joint Mortgage?
Yes, they can. If your parents can’t gift or loan you the deposit, they can remortgage their own house allowing them to release equity and use these funds to help you with your costs.
We only recommend this as a last resort, as this approach is full of risks. For instance, your parents would have to repay the remortgage loan. If they fail, they’ll risk losing the house.