Tough mortgage criteria and high house prices mean family help is the only way many people can get a mortgage
One in five house purchases by first-time buyers made in 2011 wouldn’t have gone ahead without financial assistance from parents, who have stepped in to help offspring left out in the cold as a result of lenders tightening their mortgage rules, according to research.
The report by the Centre for Economics and Business Research (CEBR) thinktank was commissioned by HSBC and comes just days after Nick Clegg suggested people may one day be able to unlock their pensions to help their children fund a property. The study looks at the contribution made by parents in the years since the early days of the financial crisis in 2008. It shows that as lenders have pulled in their horns, family members have dug deeper into their pockets.
In 2008, as the credit crunch began, parents poured a total of £4bn into helping their offspring to buy, in the form of gifts, loans and sharing the mortgage, but in 2011 that sum had risen to £5.3bn. Over the same period the percentage of homes that would not have been bought without help rose from 13% to 19%.
Alongside those purchases were others that would have been harder without parental assistance. Of 1,000 randomly selected first-time buyers interviewed by the CEBR over the past year, a third said their purchases had been subsidised by their parents. But the report didn’t include mortgages where a parent acted as “guarantor”.
The average value of the help given varied widely between the age groups. While first-time buyers aged between 18 and 26 typically received £19,000 worth of help, those aged 27-35 got £32,000, and older buyers received an average of £42,200 worth of family financing. The researchers speculated that older buyers might get more help “because they will typically have older relatives who will have longer to accumulate savings, and families may be more eager for their relatives to get a foot on the housing ladder, the older those relatives become”.
The majority of first-time buyers questioned by the CEBR said they had turned to their family for help because of difficulties getting a mortgage – just 15% said it was so they could afford a bigger home or buy in a better location. This underlines how tough the market has become for buyers as lenders have reduced maximum loan sizes and introduced much stricter affordability checks. Before the credit crunch it was possible to access a mortgage with a loan-to-value (LTV) higher than the price of the property on which it was secured, but many borrowers are now hard-pushed to find lenders willing to offer mortgages above 90% LTV, and most deals are available only to those with the cleanest credit records. Data from Moneyfacts shows that while 986 95% deals were available in September 2007, that number dipped to nine in 2009 and has only risen to 69 now.
“Mortgage lending to British first-time buyers fell off a cliff during the financial crisis,” says Daniel Solomon, CEBR economist and chief author of the report. “Families’ contributions have been invaluable, helping thousands to get on the housing ladder who would have missed out otherwise.”
Ben Bradley, a self-employed market trader based in Mansfield, is buying his first property with the help of his parents. They agreed to guarantee his loan after he discovered that even after saving for three years and accumulating enough for a 15% deposit, he couldn’t raise a big enough mortgage to buy a property. “I went to Nationwide and they told me how much I could borrow – then they said I could put down a bigger deposit, find someone to go 50/50 on the mortgage with me, or find a guarantor.”
Bradley spoke to his parents who, he says, “pretty much knew I was going to need some help from them in some way”. They agreed to guarantee his loan, which at Nationwide meant proving they could afford the monthly repayments should he default. “I’m going to try to get them off the mortgage as soon as possible,” he says.
The CEBR research shows that only in a third of cases was help given as a gift, while in the rest the parent was either lending their child money or taking part-ownership of the property. Stuart Gregory, a mortgage broker at Lentune Mortgage Consultancy, says lenders tend to be most amenable to a borrower getting help in the form of an outright gift. “From a lender’s point of view, a gift is the easiest thing to deal with. It will normally be acceptable as long as it is confirmed in writing by the parents,” he says. Gregory says a mortgage involving a loaned deposit “would be fairly difficult to place. It will need to be a lender who does individual underwriting – most high street lenders won’t allow it.”
Finding a lender willing to let you buy a property with your parents may be easier, provided you have a large enough income between you to cover the repayments. However, Gregory warns that this has become harder since the credit crunch, as many lenders have reduced the maximum age for borrowers from 85 to 75. This means a parent in his or her 60s who wants to help their child will have to take a mortgage with them over a short term, or find another way to help. Gregory says this does mean some of the first-time buyers helped in this way over the past few years may now be stuck in mortgages with their parents, unable to switch lenders because the criteria have changed.
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