Many young millennials view the possibility of owning their own property as a dream that is out of their reach. The shortage of properties in the UK has led to a continuous increase of house prices. According to the most recent price index from Halifax, house prices have increased by 2.7% over the last year. As a result, a typical property is currently worth almost £228,000.
Saving enough money for a deposit is also becoming more difficult. The cost of living has continued to rise whilst incomes have remained steady and largely unmoving. According to a study conducted by Nationwide, fist-time buyers are particularly affected as they have to put money aside for eight years to get a deposit in place.
The Post Office has launched two different mortgages which are specifically designed for young first-time buyers. The aim is to get them onto the property ladder, with some additional support from their parents.
A New Option for Millennials
The Family Link Mortgage allows borrowers to obtain a mortgage without a deposit. Instead, 90% of the property value is borrowed. The remaining 10% is raised as security against a property owned by a close relative, like the parents of the borrower.
The additional 10% is also an interest-free loan that needs to be paid off in five years. The idea is that in that time, the borrower will be in a better financial position. Furthermore, borrowers should also be able to remortgage their property to a more traditional deal.
A First Start Mortgage is another option issued by the Post Office. The first-time buyer applies with a relative who acts as a co-borrower. Then, they can be named on the title of the property. Overall, the aim is that the highest two incomes from the applicants and sponsors are used to work out how much can be borrowed. This would potentially allow first-time buyers to get a larger loan.
But There’s a Catch
Although these new mortgages seem promising, there are some downsides involved. Regarding the Family Link Mortgage, if the main borrower falls behind on their repayments, they put both their own property and that of their parents at risk of repossession. Understandably, such a commitment is extremely significant for any parent that could be risking their own home.
For the First Start Mortgage, a much bigger tax outlay for many buyers is guaranteed. This is due to the extra 3% Stamp Duty charged when purchasing second homes. Parents who want to help their children then face increased prices because the purchase will be subject to the additional Stamp Duty rate.
For example, a £200,000 property will also include an additional £7,500 Stamp Duty bill, compared to the £1,500 when buying alone. As joint borrowers, parents will be liable to meet the repayments if the borrowers fall behind on their payments.
A Big Responsibility for Parents
Whilst this new mortgage option might help millennials get onto the property ladder, the parents that would be supporting them need to consider the real possibility that their homes and finances can be at risk should repayments fail.
