Father looking to assist son and daughter-in-law buying first family home

THE SCENARIO

In recent times there has been an increase in applications involving joint mortgage applications, sole proprietor mortgages and guaranteed mortgages. We often talk about the baby-boom generation who acquired their family home decades ago and enjoyed the best of the UK property market. As a consequence many elderly parents are sitting on significant assets and looking to help their children get onto the property ladder.

Our next case study involved a joint application and a sole proprietor mortgage with a guarantee. It is safe to say this type of mortgage is not popular with all mortgage lenders.

Client scenario

While the majority of case studies start out with a relatively simple scenario which becomes more complex, this case study was relatively complex from the start. It involved an elderly father looking to assist his son and daughter-in-law in acquiring their first family home. It very quickly became apparent that the son and daughter-in-law would require a mortgage with an income multiple approaching 10 times. It is safe to say that in the current market there was no chance of securing such a deal without third-party assistance.

So, the scenario for this case study was as follows:-

Property value: £700,000
Nature of mortgage: Joint application/sole proprietor mortgage with a guarantee
Deposit: £250,000 (gifted)
Mortgage funding: £450,000
LTV: 64%

The LTV ratio of 64% is certainly an achievable target assuming that the underlying income is there to pass the affordability test. There was also the added issue of a joint application where one of the applicants will not be on the mortgage or property deeds. Indeed, owing to the father’s age many mortgage companies would simply refuse to provide funds.

Issues to address

As we touched on above, there are a number of issues to address regarding this particular mortgage application. These include:-

Wealth: Deposit from father, modest family income
Income: Family income PLUS element of father’s pension and investment income
Mortgage funding: £450,000
Mortgage type: Capital and interest
LTV rate: 64%
Joint applicant: Age of parent was an issue

Aside from the age of the parent this application was beginning to take shape; the father would join in the joint mortgage application so that his son and wife could pass the affordability calculation. He had sufficient pension and investment income to subsidise above and beyond the family’s income shortfall. We now needed to find a mortgage lender who would accommodate joint applications, sole proprietor and guarantor mortgages involving an elderly parent.

There was also the issue of additional stamp duty if the father was seen to be acquiring the property (a second home). Therefore everything had to be structured appropriately and his name not added to the deeds.

The solution

When we investigated further it was fairly obvious we would require a specialist/niche lender to create the required structure. We were able to negotiate with a mortgage company willing to accommodate a joint application, sole proprietor mortgage with a guarantor. As we touched on above, the son and daughter-in-law would have required a mortgage with an income multiple approaching 10 on their own income, which was just not viable. There was an issue with the father’s age but due to the pension and investment income there was more than enough funding to cover the shortfall.

We therefore we created a very detailed structure which dovetailed perfectly with joint incomes, guarantees and mortgage affordability. The solution was as following:-

Property value: £700,000
Gift deposit from father: £250,000
Mortgage funding: £450,000
Mortgage type: Capital and interest
Mortgage term: 27 years
Mortgage affordability: Income from father, son and daughter-in-law
Guarantees/security: Father’s significant pension/investment portfolio

We managed to negotiate an array of fixed mortgage interest rate options which are listed below:

2 year fixed

Interest rate: 2.69%
Early repayment charge: 2% in year 1 & 1% in year 2. None thereafter

3 year fixed

Interest rate: 2.99%
Early repayment charge: 3% in year 1, 2% in year 2, 1% in year 3. None thereafter

5 year fixed

Interest rate: 3.19%
Early repayment charge: 5% in year 1, 4% in year 2, 3% in year 3, 2% in year 4, 1% in year 5. None thereafter

Under normal circumstances the property owners would not have been able to afford the required mortgage. However, the father’s pension/investment income this was used to cover the shortfall. As we were able to ensure the father’s name was not added to the deeds this did not trigger additional stamp duty charges as if he had been acquiring “a second home”. It is our role to investigate all options and secure the appropriate deal structure with the necessary income, securities and assets in place.

What can Enness do for you?

We have seen a significant rise in the number of mortgage applications involving assistance from parents who do not want to be part of the property deeds. There are ways and means of structuring deposit gifts as well as making up any shortfall in mortgage affordability calculations. This case study involved certain guarantees regarding mortgage payments although with elderly parents it can be difficult to find competitive offers. However, over the years we have built up some very strong relationships with private banks/niche lenders that have allowed us to negotiate deals which would not normally be on offer.

If you find yourself in a similar situation to the above case study please feel free to contact us. We would appreciate the opportunity to discuss your finances and requirements in more detail. The more detail we have the better we can structure potential mortgage funding around your specific scenario. We have access to real-time market rates and can provide you with actual monthly payments going forward so you can compare and contrast the various options.

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