Table of Contents
1. Introduction
3. What are Joint Borrower / Sole Owner Mortgages?
4. The Role of the Bank of Mum and Dad (and Grandparents)
5. Releasing Equity to Help Family Members
6. Borrowing with or from Friends and Family: Legal Considerations
7. Best Practices for Shared Ownership and Joint Borrower / Sole Owner Arrangements
Introduction
Getting on the property ladder can feel like a daunting task, especially with rising house prices and stricter lending criteria. For many, schemes like shared ownership and support from family—often dubbed the “Bank of Mum and Dad”—can make the dream of homeownership a reality. In this guide, we’ll explore these options in detail, including how family members can release equity to help, and the best practices for navigating financial arrangements with friends and family.
What is Shared Ownership?
Shared ownership is a government-backed scheme designed to make homeownership more affordable. With this option, buyers purchase a share of a property (usually between 25% and 75%) and pay rent on the remaining portion owned by a housing association.
How Shared Ownership Works:
1. Initial Purchase:
• You buy a share of the property with a deposit and a mortgage.
• The deposit is typically based on the share value, making it more affordable than a traditional purchase.
2. Paying Rent:
• You pay rent on the portion of the property you don’t own.
• Rent is usually set below market rates.
3. Staircasing:
• Over time, you can purchase additional shares (up to 100%) through a process called staircasing, reducing the rent you pay.
Benefits of Shared Ownership:
• Lower deposit requirements.
• Affordable way to enter the property market.
• Opportunity to own more of the property over time.
Things to Consider:
• You’ll need to pay for maintenance and service charges, even on the rented portion.
• Selling a shared ownership property can be more complex.
What are Joint Borrower / Sole Owner Mortgages?
A Joint Borrower / Sole Owner mortgage allows a family member or close friend to act as a form of guarantor, providing additional security for the lender and using more available income to allow the mortgage top be affordable. This is often used by first-time buyers who have limited deposits or lower incomes.
How Joint Borrower / Sole Owner Work:
• Each additional family member can use their spare income to boost the applicants affordability, by being part of the mortgage application
• The property is in the sole name of the applicant, so there is no additional Stamp Duty to pay.
Benefits of Joint Borrower / Sole Owner Mortgages:
• Enables buyers to secure a mortgage with a smaller deposit.
• Helps buyers access better interest rates.
• Increases the amount any lender will provide
• Provides a safety net for lenders.
Risks for the Additional Borrower:
• The additional borrowers are legally responsible for the mortgage if repayments are missed.
• The mortgage may limit the additional borrowers ability to obtain a mortgage for themselves in the future.
The Role of the Bank of Mum and Dad (and Grandparents)
Family members often play a key role in helping first-time buyers onto the property ladder. This support is commonly referred to as the Bank of Mum and Dad, but grandparents are increasingly stepping in as well.
Ways Family Can Help:
1. Gifted Deposits:
• Parents or grandparents can provide part or all of the deposit as a gift. Most lenders require a letter confirming the gift does not need to be repaid.
2. Equity Release:
• Older family members can release equity from their homes to provide funds for a deposit. This is a popular option for grandparents looking to support their children or grandchildren.
3. Savings as Security:
• Some lenders offer family offset mortgages, where a guarantor’s savings are used to reduce the mortgage amount, making repayments more affordable.
4. Guarantor Mortgages
• Smaller lenders still offer the opportunity for a parent to be a guarantor on borderline cases, most lenders prefer the concept of the Joint Borrower / Sole Owner Schemes instead
Releasing Equity to Help Family Members
Releasing equity involves borrowing against the value of your home, providing a lump sum or regular income that can be used to support family members. This is particularly common among parents and grandparents who are mortgage-free or have significant equity in their property.
How Equity Release Works:
• Available to homeowners aged 55 and over.
• The most common type is a lifetime mortgage, where the loan is repaid when the property is sold, often after the homeowner passes away or moves into long-term care.
Benefits of Equity Release:
• Provides tax-free funds to help loved ones.
• Allows older homeowners to remain in their property.
• Can be a flexible way to support family members without depleting savings.
Things to Consider:
• Equity release reduces the value of your estate.
• It’s important to discuss plans with family members and seek legal advice to ensure everyone understands the implications.
Borrowing with or from Friends and Family: Legal Considerations
Whether you’re borrowing money from family or buying a property jointly, it’s essential to handle the arrangement professionally. Here are some key legal considerations:
1. Gift or Loan Agreement:
• If money is being provided as a loan rather than a gift, ensure there’s a formal agreement in place outlining repayment terms.
2. Joint Ownership:
• If buying a property with a friend or family member, consider whether to register as joint tenants or tenants in common, as this affects ownership shares.
3. Inheritance Tax Implications:
• Large financial gifts may be subject to inheritance tax if the donor passes away within seven years.
4. Seek Independent Legal Advice:
• Both parties should consult independent solicitors to ensure the agreement is fair and legally binding.
Best Practices for Shared Ownership and Other Schemes
1. Open Communication:
• Discuss expectations and financial responsibilities upfront with family members or friends.
2. Plan for Worst-Case Scenarios:
• Consider what will happen if the guarantor needs access to their savings or if a borrower’s circumstances change.
3. Work with a Professional Broker:
• A broker can help you navigate complex arrangements, ensuring you understand the legal and financial implications.
4. Keep Records:
• Maintain clear documentation of any financial agreements to avoid misunderstandings.
How EHF Mortgages Can Help
At EHF Mortgages, we understand that buying a home often involves support from loved ones. Our team of professional brokers specialises in navigating shared ownership schemes, guarantor mortgages, and equity release options.
Why Choose Us?:
• Expert Guidance: From equity release to legal considerations, we provide personalised advice to ensure you and your family are protected.
• Whole-of-Market Access: We work with a wide range of lenders offering tailored products for shared ownership and guarantor arrangements.
• Seamless Process: We handle the paperwork and liaise with lenders to make the process as smooth as possible.
Conclusion and Next Steps
Shared ownership schemes and Joint Borrower / Sole Owner mortgages offer valuable pathways for getting on the property ladder, often with the help of family and friends. By understanding the options available and following best practices, you can secure a home while protecting everyone involved.
Ready to explore your options? Contact EHF Mortgages today to book a consultation and take the first step towards homeownership with expert guidance.
