Are You Planning to Help Your Child get their First Mortgage?
First-time buyers often find getting onto the housing ladder to be a challenge, but never more so than today. Rising property values; student debt; stricter affordability requirements; generation rent: all combine to make things incredibly difficult for many of the current generation of first-time buyers.
Joint Borrower - Sole Owner
For those who are not yet earning enough to meet the assessment of affordability requirements that lenders must work to, there is a solution called ‘Joint Borrower – Sole Owner’. This works by allowing the first-time buyer to add a parent to the mortgage so that their income can also be considered, whilst the legal title to the property is held solely in the name of the first-time buyer.
There are several potential benefits to this: the first-time buyer may be eligible for the current waiver of stamp duty that the government has made available to first-time buyers, and it will mean that the parent isn’t buying a second home, which could trigger a higher rate of stamp duty under current rules. It also means that when the first-time buyer can afford the mortgage on their own there will not need to be a change to the title of the property.
What is an offset mortgage?
Offset mortgages can be a great way to save money. They can either help you reduce your monthly payments, or shorten the term and help you get mortgage-free sooner.
How offset mortgages work
Offset mortgages are a type of product that let you link your mortgage to your savings.
The savings balance is used to reduce the amount of interest charged on the mortgage. Your savings will be 'offset' against the value of your mortgage, and you'll only pay interest on your mortgage balance minus your savings balance. Your savings don't actually repay any of your mortgage, they just sit alongside it and save you interest. It works something like this:
You have a mortgage of £100,000. You're paying an interest rate of 2.00%.
You also have £10,000 in a savings account. By offsetting your £10,000 savings you only pay interest on £90,000 of your mortgage.
Over the course of the year this can save you up to £200.
If you'd have left these savings in a savings account paying 0.500% (a pretty decent rate at the moment), you would have earned £50 in interest. If you have to pay tax on your interest, it would be even less.
Plus, you'd still have to pay that £200 you didn't save on the mortgage.
Choose between lower payments or a shorter term
With your offset mortgage, you can choose how to benefit from the interest you save:
Make bigger savings by overpaying or saving more
Once your savings are offset against your mortgage, you can still add to them – more money offset means more interest saved.
Some offset mortgages also allow you to overpay. This will have the same effect of saving you interest, but with one big difference…
Overpaying means you physically repay part of your mortgage – you may lose access to this money if you need it later. Offset savings, on the other hand, remain alongside the mortgage. They don't repay it, so you still have access to your money.
Offset mortgages can be great for parents helping children get on the property ladder
As opposed to becoming a guarantor, or physically giving your child money towards buying a new home, offset mortgages offer a great alternative.
Some offset mortgages allow family to offset their savings against a relative's mortgage. The benefits are that:
The parent can then transfer their money into a normal savings account - once the child is ready to take the reins of the mortgage fully.
The pros and cons of offset mortgages
Offset mortgages are a great way to save interest on your mortgage, but there are disadvantages as well:
Save more interest than you can earn in a savings account
Put money aside for tax bills and save on interest on your mortgage until you need to pay your tax bill.
You can get at your money quickly – it's not locked away.
A small amount of savings can make a big difference – a modest pot of £2,500 could shorten a £100,000 mortgage by seven months over a 25-year term!
You don't have to have all of your savings in one account. You can have several savings accounts offset against your mortgage – even family members can offset their savings against your mortgage!
Pay no tax on the interest you save – you may have to pay tax on interest earned on a normal savings account (apart from cash ISAs)
Keep easy access to your savings (remember the mortgage payment may go up if you make a withdrawal from your savings)
Finish your mortgage sooner, or make lower monthly payments
Help a child or relative get on the property ladder
Your savings don't earn interest. So, if you rely on your savings for income, offsetting against someone else's mortgage is not a good idea
Your savings will lose their spending power, as they won't grow.
For more information on the Joint Borrower-Sole Owner Mortgage or on the Off-set Mortgage or for a free mortgage health check please contact us at firstname.lastname@example.org