MORTGAGES
Aldermore’s new loan, The Family Guarantee Mortgage, will allow first-time buyers (who must be at least 25 years of age) to borrow up to £250,000. The loan is only available on a repayment basis and buyers will of course have to prove to Aldermore that they can afford to make the repayments. The loan will also have to be guaranteed by a family member (the guarantor) and they, too, will have to prove that they can afford the repayments on the borrowed sum should the borrower default. To begin with, the loan will be piloted through three just distributors – Connells Group, Arun Estates and 3mc. With loans such as these, there are
always benefits and downsides. The loan will undoubtedly help to get more first- time buyers on the housing ladder (provided they are over 25 year of age, of course.) There are a huge number of first- time buyers who can easily afford the repayments on a mortgage, but who are unable to obtain a mortgage because they don’t have a sufficient deposit. This loan will benefit them, as no deposit is required. Also, unlike some other loans where a guarantor is required, the needs of the guarantor appear to have been taken into account more. It can be difficult for a first- time buyer to ask a family member to act as a guarantor (and equally daunting for a family member to accept), so potential guarantors will welcome the fact that the loan guarantee is capped at the originally agreed amount, can be repaid at any time, and will expire after 10 years, meaning that the buyer will then have sole responsibility for repaying the loan. However, before first-time buyers get too
carried away, a note of caution is required. Firstly, the loan is fixed for three years, with an interest rate of 6.48 per cent. With interest rates at record low levels, this could be seen as an expensive option. Secondly, the spectre of negative equity is never far away and should not be discounted – a small drop in house prices could see first-time buyers with a home worth less than the balance of their loan. Thirdly, potential guarantors must seriously consider their position before guaranteeing a family member’s loan. Whilst it is natural for parents to want to help their children onto the property ladder, their own home (and future) could be in jeopardy if their child defaults on the loan. We must also remember that it was only three short years ago that deposit-free mortgages disappeared completely, when the recession hit hard and property prices
slumped. Whether their return to the marketplace is a good or a bad thing remains to be seen.
Other OptiOns One thing is for sure – first-time buyers should consider all their options before financially committing themselves. There are also other options available. In this year’s Budget, the Government announced a new equity loan scheme to assist first-time buyers and boost the construction industry. The scheme, called FirstBuy, will see the Government and house builders offer loan assistance for
(and very generous) parents, a number of obstacles stand between them and owning their own home. It is no surprise that in 2011, the average age of a first-time buyer is now 34. However, the Government has publicly committed itself to increasing the number of homes being built and to reforming planning policy. And now there are signs that some lenders, such as Aldermore, are reaching out to first-time buyers, with the rise in the number of higher loan-to-value products providing help to borrowers with small deposits. That said, with lenders still recovering from the credit crisis and most unwilling to
Potential guarantors should seriously consider their position before guaranteeing a ‘child’s mortgage.’
eligible first-time buyers who want to purchase a newly-built home. Under the scheme, buyers will need to
provide at least 80 per cent of the purchase price (through a deposit and mortgage), with the Government and relevant house builder offering an equity loan of up to 20 per cent. Eligibility criteria for this scheme will be the same as for the existing HomeBuy schemes: first-time buyers must be earning less than £60,000; the maximum property price is £280,000 (or £300,000 in exceptional cases); the buyer’s mortgage will be secured as a first charge on the property, with the Homes and Communities Agency and house builder taking a second charge over the property; and the equity loan will be interest-free for the first five years (from then on, an annual fee of 1.75 per cent will be payable in monthly instalments and increased annually in line with the Retail Prices Index plus 1 per cent.) The first homes will become available to purchase this month. First-time buyers are in a difficult
position. Unless they have very wealthy
take on too much risk, first-time buyers may still be reliant on guarantors and the ‘Bank of Mum and Dad’ for a little while longer. Reliance on the ‘Bank of Mum and Dad’ also carries with it risks and consideration should always be given in such circumstances to taking legal advice and entering into either a form of family charge over the property or often a Declaration of Trust to ring-fence the investment of Mum and Dad. This can prove invaluable in events such as the first time buyer ever becoming bankrupt or divorced. Such events can lead to the monies put towards the property becoming lost or ending up where they were not intended. It is therefore better to consider such events beforehand and plan for them.
Richard John is a Partner in the Property Dept. for Matthew Arnold & Baldwin LLP.
Richard.John@
mablaw.com
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PROPERTYdrum OCTOBER 2011 43
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