Can You Get a Joint Mortgage with Parents?
Have you ever considered getting a mortgage with your parents? It's a big step, but for first-time buyers struggling to save up for the required deposit or with a poor credit report, joint mortgages are definitely worth investigating. Here's everything you need to know.
What is a joint mortgage with parents?
A joint mortgage means borrowing money for a home with someone else, which can include your parents. It means that everyone included on the application form will have to meet the lenders' criteria and you will all be liable for keeping up with mortgage payments.
In essence, it is the same as if you were to get a joint mortgage with a partner or friend, with the difference being that your parents won't be living with you and are entering into the agreement to help you get onto the property ladder.
Does a joint mortgage affect your credit score?
Having a joint mortgage means being linked to someone else financially on your credit record, so if parents help out their children in this way, all parties will have potential implications for their credit score.
Initially, this is a bonus for those buying the home and one reason why a joint mortgage can be essential, because if their parents have excellent credit scores, being associated with them makes it more likely for them to receive a mortgage offer.
Having a joint mortgage doesn't necessarily mean there will be a direct impact on anyone's credit rating, but any future applications for credit will factor in the scores of everyone involved, particularly if there have been any missed payments or defaults.
This is the risk involved with a joint mortgage, which is why they should only be taken out by people who trust each other to manage their own finances responsibly.
Does a joint mortgage mean joint ownership?
A joint mortgage isn't the same thing as joint ownership. If you buy a home with someone else and take out a mortgage together to pay for it, you will have all of your names on the deeds to the property, meaning that you are joint owners by law.
However, getting a joint mortgage with your parents would only mean that they share responsibility for the repayments, they wouldn't be joint owners of your home unless you had their names on the deeds.
There are different levels of homeownership to suit different situations:
Joint tenants jointly own 100% of the home, which means that when one person dies, the other will automatically inherit it. This is the option most likely to suit homebuyers who are married or in a long term relationship, rather than buying with friends or receiving support from parents.
Tenants in common
Another option is being tenants in common, who own a share (it can be equal but it doesn't have to be) of the home and each owner can leave their share to someone else in their will instead of being automatically left to the others. This is usually the best option for friends buying a home together.
How long does a parent stay on a joint mortgage?
Buying a home with a joint mortgage with parents is a useful way for people to get on the property ladder when there was no other option. However, it isn't a situation that most would like to have last a long time, and ideally, a joint mortgage should only run for a few years.
This should be long enough for the homeowners to be able to get approved for a new mortgage on their own, particularly if their circumstances have changed - for example, their income has increased or they are with a partner who can be added to the mortgage to replace the parents.
Alternatives to joint mortgages with parents
A joint mortgage is a big commitment for parents to undertake, and there are other options available to enable them to support their children in different ways.
The more traditional method of parental support is an investment from the Bank of Mum and Dad in their child's first home. As a gift, it isn't a loan and there is no expectation that it will be paid back, nor that the giftee will receive anything other than eternal gratitude for it - so they won't be part-owners of the home, for example.
This money usually makes up whatever is needed to help the buyers afford the necessary deposit for the mortgage they want. The larger the deposit, the better interest rates are available, so a parental gift can be one that keeps giving in the form of lower monthly mortgage payments.
It's crucial that the solicitors and mortgage lenders involved are aware that this gift has been given and they will need to see a letter from the parents as evidence of the gift, along with some proof of their ID, address and some bank statements. These help the lender comply with their anti-money laundering obligations.
If the parents aren't able to gift what can be a very large sum of money but still want to help their children buy a home, they can loan the money with the expectation that it will be paid back.
Mortgage lenders generally prefer gifted deposits, which certainly offer less potential complications, and they will factor your repayments to your parents into what you can afford to borrow, so a loaned deposit is unlikely to allow you to borrow as much as a gifted one.
It is also important for parents and children to have frank discussions about the repayment amounts and schedule and whether any interest will be charged, which would incur income tax for the parents.
Guarantor mortgages offer the same benefits as joint mortgages for buyers who don't have enough income to qualify for a mortgage on their own. They allow parents to offer a guarantee that they will repay the mortgage amount if the buyer doesn't repay on schedule.
Before applying for guarantor mortgages it's important to consult a solicitor to get legal advice. Parents acting as guarantors can only be released from this responsibility when the borrower is deemed to be able to cover the entire mortgage or have paid it in full.
Family offset mortgages
A family offset mortgage is another option for parents to offer their support and means that their savings account is linked to the mortgage to effectively offset it, reducing the amount of interest due and making it more affordable for their children.
The amount borrowed is reduced by the value of the savings in the account, lowering the loan-to-value and potentially the monthly repayments needed. In this way, it's similar to a traditional offset mortgage, with the difference being that the savings account used doesn't belong to the buyers.
As well as helping the younger generation to get on the ladder, this type of mortgage also means that parents can support them without needing to actually gift or loan a large amount of money, keeping it safe in their savings account instead, with the aim of getting it back once the child is able to take over the mortgage completely.
Remortgaging the parental home is another option to get the money needed to help family members, with the extra money borrowed going to help them increase their deposit to get themselves a mortgage. It's an option that comes with risk for the parents in terms of potentially losing their home if they can't keep up with their own repayments.
Tips for parents considering a joint mortgage:
If getting a joint mortgage still seems like the best bet for parents who want to help their children buy their own property, there are several things that they need to consider and investigate before taking that big step:
Speak to a mortgage expert
Before talking to a mortgage lender about making this commitment, you need to get financial advice from an expert, like a mortgage broker who will help you examine your own financial circumstances and be able to advise you on your best options.
Understand the tax implications
It's also important for you to know exactly what the tax implications are of a joint mortgage as you may be liable for taxes associated with your child's property as a result and there are also implications for inheritance tax.
Update your will
Another crucial area that will need attention is your will because a joint mortgage will mean an investment in property and you will need to determine what you would like to happen to it in the event of your death.
Be clear on the financial risks and liability
As parents, you will be eager to help your child, but you also need to make sure you understand the risks involved with a joint mortgage before making the decision. Understanding and discussing these will give you a better chance of getting into difficulties later on.
Communicate clearly, and honestly with your child
Any kind of financial arrangement like this can put a strain on relationships, particularly with a family member as you will both be taking on mortgage debt. Joint mortgages can be a great step for all involved to take together, but clear and honest communication at all stages is essential to avoid misunderstandings and arguments.
Consider the maximum age cap on mortgage terms
A mortgage is a long-term commitment, so many lenders will have a maximum age gap on their lending criteria that mean they won't be lending money to people over a certain age. This can range from as low as 65 to as high as around 85 but it's important to investigate this early on in the process if you think age might be an issue.
Make it legal
You might think that getting into an arrangement like this with a family member means that it can work on trust alone but joint mortgages are complicated so you need to be seeking expert advice about making it legal. Getting a legally binding agreement drawn up by a solicitor protects you all.
Getting onto the housing ladder is a challenge for many young people, so it's natural that parents want to help them out, whether through a gifted deposit, a loan or a joint mortgage. Getting a mortgage with your parents is a route to homeownership that comes with risks and challenges, but with the right advice and support, it can be a life-changing decision for all the right reasons.