A Helping Hand From The Older Generation

I have a client who recently enquired about releasing a small amount of capital from his home, and although he potentially had some requirement for capital he spoke at length at the problems his daughter had in her attempt to buy her first home.  She started looking a few years ago and her income was reasonable, but she was being priced out of the market, mainly by buy to let investors, and eventually this stopped her looking as the market became too hot.

 

As the market has cooled she has started to look at houses again and is horrified to see how lenders attitudes to first time buyers have changed.  Although she can now identify properties she thought were in her price range she was surprised to find out that lenders had cut their income multiples and therefore this affected what she could borrow.  Also, she had anticipated getting a 100% mortgage but she has soon found out they are not available.  Previously, if a first time buyer had to fund a deposit, 5% was sufficient, and lenders were falling over themselves to offer special rates.  Now lenders want a minimum of 10% deposit and charge premium rates of between 6.5% and 7.5% to reflect what they would say is for the risk they are taking.  It could also be argued that perhaps the rates they are charging reflect their attempts to rebuild their profits by exploiting the most vulnerable borrowers.  Unfortunately, the nett result for this lady, in her late thirties, is that due to her inability to save due to her relatively high rent, she is still locked out of the housing market.

 

The man telling me this story lived quite well on his retirement income and was just enquiring about releasing a small amount of capital to perhaps replace his car and do some home improvements.  He was unable to save up for these items but as mentioned earlier could live on his pension for day to day living.  He was also most anxious that his daughter would inherit something from him, although aware that by taking out a lifetime mortgage the estate would diminish.  He was hoping enough equity would be left over for her to buy a house, but as he was in his mid sixties, and in good health, I got to thinking she could be retired before she eventually got her foot on the housing ladder.  By then she could have paid rent for a further 25 years and all that dead money paid out when she could by then own her own house outright all for the lack of a deposit.

 

I believe it is worthwhile for parents or grandparents who do not have large amounts of savings, but who want to help their children or grandchildren get onto the housing ladder, to consider releasing money from their house to fund a deposit via a lifetime mortgage.  Lifetime mortgages do not require any payments as the mortgage interest gets added to the mortgage and is paid off when the house is sold.  This will mean less inheritance, but I believe this could be more than outweighed by the benefits of the children or grandchildren owning their own home.  Lifetime mortgages have evolved and some schemes allow payments to be made, so if the recipient of the deposit wants to protect their inheritance they could pay the deposit off.

 

I think the above scheme could benefit first time buyers and give relatives the satisfaction that they have helped out at a time when it is most needed.  Also, by providing more than a 10% deposit the interest rate falls significantly.  However, this arrangement is not suitable for every one and I would urge you to consult an IFA who specialises in these areas.

 

Kieron Bassett Financial Services have two IFAs.  Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or log onto www.kieronbassett.com/cms.

 

Kieron Bassett CertPFS

18^th May 2009