With the Help to Buy ISA launching last year and the introduction of the Lifetime ISA proposed for April 2017, questions surrounding property purchase for first-time buyers are rife. Barclays has put another spanner in the works for already bewildered buyers with their launch of the Family Springboard Mortgage, but could it be an attractive alternative for those confused by the talk of ISAs?
Essentially a revamp of the original Springboard Mortgage which launched three years ago, Barclays is now scrapping the need for a 5% deposit from first-time buyers. Inevitably, all shiny new things come with a catch, and this one wallops parents smack bang in their purses. Like the original Springboard Mortgage, parents are still hit with the 10% savings tie which holds their money in the Helpful Start Account for a minimum of three years. This 10% acts as security for their children’s home loan, allowing their pride and joy to luxuriate in a new property without having to fork out a penny themselves in terms of a deposit.
However there is, a glimmer of hope for parents: they can earn interest on this savings account at the current base rate plus an extra 1.5%.
The decision to abolish the 5% deposit requirement is part of a scheme of changes that Barclays has set in place to rejuvenate the Springboard Mortgage of 2013, which originally aimed to take away the necessity of parents gifting lump sums of cash to their children for their property purchase.
Formerly, Barclays had security of 15% of the purchase price of a property; 10% in a savings account from parents, and 5% as a deposit from the buyer. The original interest rate was 4.9%, meaning somebody buying a home at £160,000 would require £8,000 for their 5% deposit and £16,000 from their parents filtered into a savings account.
With the introduction of the new mortgage rate of 2.99% (fixed for three years), parents would still need to cough up the £16,000 for a £160,000 property, but the buyer would benefit from mortgage repayments of £682 per month, with no upfront expense of a deposit.
Raising the income multiple is another enhancement made by Barclays. Now a borrower earning at least £50,000 can benefit from a 5.5 multiple, as opposed to the 4.4 the bank offers to its other borrowers. With an income multiple of 5.5, an individual earning £50,000 could borrow up to £275,000, a staggering difference of £55,000 in contrast to the £220,000 that same individual would have been able to secure with the previous Springboard Mortgage scheme.
Despite the improvements Barclays has made seeming rather rosy, the major risk falls to the parents, with their money acting as financial security. If a borrower misses a payment, Barclays can hold onto their parent’s money in the Helpful Start Account for longer than initially planned. Similarly, if a buyer can no longer make mortgage payments, the 10% will sit in the savings account until a solution has been found.
In some worst case scenarios, when repossession is the outcome, parents could lose the money they placed in the savings account to cover any shortfall between the money Barclays is owed and the amount realised when the property is sold.
It is unavoidable that all services have pros and cons, and perhaps in today’s society, when it is tougher than ever for young adults to get their foot on the property ladder, it will be the norm that parents help their children to secure their first property and take any repercussions on the chin. It is claimed that one in 4 mortgages is part-funded by parents and this could be the beginning of a new trend. But, are there any other options that could be of interest for parents who are willing and financially astute enough to help out their children?
Wealth manager St James’s Place has teamed up with Metro bank to offer an Integrational Mortgage Range. The scheme has similar principles to the Barclays offering, with relatives contributing savings into a Secured Deposit Account, to give their family member’s loan more security and get them a better rate. However, it pays no interest and a £999 fee also applies.
The mortgage rates for this system are determined by the deposit and Secured Deposit Account contributions and start from 1.99% for a buyer with a 5% deposit and a further 20% held in the related savings account.
Family deposit mortgages are another option. Parental contribution is held as security in a deposit account by the lender, but it still benefits from interest and is returned if their child’s mortgage doesn’t go to plan.
Lloyds TSB’s Lend a Hand Mortgage is the most recognised family deposit mortgage. A deposit of 5% is required from the buyer, with family or friends supplementing a related savings account with 20% of the property value. However, these figures work on a sliding scale; if a buyer were to put down a 7% deposit, the ‘helper’ would only need to put 18% of the property value into savings. Essentially, as long as a required sum of 25% is held, then the deposit and savings percentages can be altered to suit individual circumstances and can be used against a property up to £350,000.
The ‘helper’ is required to hold their savings with Lloyds for 3.5 years, and although cash cannot be accessed during this period, the sum will earn interest at a fixed annual rate of 2.7%.
The security of a percentage lump sum from a parent, relative or friend benefits the first-time buyer in regards to interest rates. It’s fixed for three years at 4.2% and, if the holder of a Lloyds current account, this could potentially be even lower.
An alternative option is the Offset Plus deal from Yorkshire Building Society and sister lender Chelsea Building Society. It enables first-time buyers’ family and friends to help them get their hands on their first property by providing a cash sum, but under this scheme they can retain access to it via an offset mortgage.
Regular offset mortgages work by buyers putting their savings into a linked account with the bank; the cash balance is then offset against the debt of their mortgage. So, if you had a mortgage of £200,000 and £70,000 in savings, you’d only pay interest on £130,000.
The Offset Plus deal from Yorkshire and Chelsea means that the money put into savings from family and friends is linked to the mortgage instead of the individual. The linked account containing the savings will be in the buyer’s name, but the helper can access it when they desire and the benefit to the buyer will increase and decrease based on the amount of savings in the account. This means that if the helper takes out their savings, the mortgage rate will increase.
The helper will not receive any interest on their savings with Yorkshire or Chelsea, but for helpers who are higher rate taxpayers, it means they won’t pay any tax on the interest either whilst helping a first-time buyer.
The Offset Plus agreement, which is available on all the Yorkshire and Chelsea’s regular offset deals, are priced around 0.20% higher than the non-offset versions.