What to consider when getting a Joint mortgage with your parents
In this brief guide, we will discuss getting a Joint mortgage with parents an what you should consider when doing this.
Parents have been very helpful for first-time buyers looking to get on the property ladder. In Fact, the bank of mum and dad has become a real financial force in the UK but aside from lending or gifting you your mortgage deposit your parents could also simply increase your mortgage affordability by getting Joint mortgage with you.
Getting a Joint mortgage with your parents is a whole lot different than getting gifted a mortgage deposit. With a gifted deposit you would have to consider the tax implications and legal ramifications (if any).
What to consider when getting a Joint mortgage with your parents
One important differentiating factor when you get a Joint mortgage with your parents is that your parent’s names will be on the mortgage deed and they will own the property along with you. This means your parents will be just as liable as you for the mortgage. If you fail to make your mortgage repayments then the mortgage lender will chase you and your parents as the mortgage is jointly owned by all of you.
Getting a Joint mortgage with your parents also means you will now have a financial association which may be recorded on your credit score. This means if you miss any of your mortgage repayments then a negative mark will be recorded on your credit score as well as your parent’s credit score.
If the home is repossessed because you fail to keep up on your monthly mortgage repayments then this will also be noted on your credit report as well as on your mortgage.
Getting a Joint mortgage with your parents will also mean that your parents now have a say in anything to do with the property and this could bring about disputes. When getting a joint mortgage you should always seek advice to figure out how you intend to split the living space, the responsibility of repaying the mortgage, what happens when you want to sell the house, how the shares in the property are split? Are they split equally or proportional to how much each person pays or put down as a mortgage deposit
Taking legal advice before getting a Joint mortgage with parents is very important as if any of these issues arise after you have taken out the mortgage it may make the relationship with your parents a bit more complex.
When considering if to give you a mortgage the mortgage lender will usually want the mortgage term to end by the time an applicant reaches 75. This means if your parents are close to 75 you may not be able to get a long mortgage term and this may reduce your eligiblity for the mortgge as your monthly mortgage repayments may increase to a point which you cannot afford per month due to the mortgage having a smaller term.
If your parents are also currently not working then getting a Joint mortgage with them may not necessarily improve your mortgage affordability.
Why should you consider getting a Joint mortgage with your parents?
Getting a Joint mortgage with your parents will mean that you may be able to get a mortgage much sooner than you would have if you had to save a mortgage deposit on your own and wait till your income was large enough to accommodate the mortgage size you are looking for.
Most mortgage lenders will decide how much they will lend to you based on an income multiple. Different mortgage lenders have different income multiples which they use based on their lending criteria.
A mortgage lender with an income multiple of 4 will only lend to you on a £400,000 house if your income per year was at least £100,000.
If your income is £100,000 but rather £40,000 then getting a Joint mortgage with your parents may allow you to have a combined income of £100,000 and hence increase your mortgage affordability for the £400,000 mortgage.
So getting a Joint mortgage with your parents can increase your mortgage affordability and reduce how long you have to wait to get a mortgage. Getting a Joint mortgage with your parents can also increase how much you can borrow.
With the example above a £40,000 income will only have made you eligible for a £160,000 mortgage with that mortgage lender rather than the £400,000 mortgage you were after.
Getting a Joint mortgage with your parents may also be beneficial in a case where your parents have the savings for a mortgage deposit but do not simply want to lend this money to you.
By allowing your parents to be on the mortgage as well this means you will benefit from them putting down the mortgage deposit and you making the monthly mortgage repayments.
Alternatives to getting a Joint mortgage with your parents.
You don’t necessarily have to get a Joint mortgage with your parents. There are a bunch of mortgages provided by some mortgage lenders which act like guarantor mortgages but are more commonly referred to as family springboard mortgage, they include mortgages from lenders such as the Barclays family springboard mortgage, the Lloyds lend a hand mortgage or the post office family link mortgage.
With these mortgages, your parents will have to put some money away in a savings account which servers as your mortgage deposit and are usually required to be kept for 3 years. Your parents will receive interest on their savings and as long as you have made your monthly mortgage repayments then they should receive their savings at the end of the 3 years.
You will also usually be put on an initial 3-year fixed-rate mortgage.
Rather than getting a Joint mortgage with your parents, you may also be eligible for first-time buyer schemes which increase your available mortgage deposit or reduce the total cost of the property.
- Lifetime ISA– gives you a government bonus of £1,000 if you save the maximum £4,000 a year.
- Help to buy ISA– gives a maximum bonus us £3,000 if you save the maximum allowed of £12,000. Before you get either you should consider which is better. Lifetime ISA vs Help to buy ISA.
- Help to buy equity loan– gives you up to 40% as a 5-year interest-free equity loan. You begin to pay interest at 1.75 % after the fifth year and 1% plus RPI for every year thereafter.
- Shared ownership- You can buy between 25% to 75% of the property initially with a shared ownership mortgage and then buy more using a staircasing mortgage.
- Armed forces help to buy- similar to the help to buy equity loan but specific for the armed forces personnel giving them an increased chance of acceptance.
- Rent to buy- This is the right to buy scheme on which this guide is currently discussing. A different marketing name is just used. Watch out for this when shopping to avoid missing out on eligible properties due to confusion.
- Right to buy- allows you to buy your home at a discount price.
- Preserved right to buy– same as above.
- Right to acquire- same as above.
Depending on where you live, you may also be able to take advantage of home buying schemes provided by your local council. Example: In Norwich, the local councils provide the Norwich home options scheme.
Tax implications when getting a Joint mortgage with your parents
When getting a Joint mortgage your parents must consider the tax liability (Capital gains tax) and the stamp duty liability.
If you are trying to claim any first-time buyer relief such as the above schemes you may become ineligible if your parents are not first-time buyers.
This will be the case for both the stamp duty and the first-time buyer government schemes.
Getting a Joint mortgage with your parents may be a much faster way to get on the property ladder but you must consider the legal consequences.
When considering if to get a Joint mortgage with your parents you should seek mortgage advice.
You may need to seek more specialist mortgage advice if you have bad credit or are self-employed as getting a mortgage may be much harder.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.