May 4th, 2016
The insurer, Legal & General, released data yesterday that confirmed the level of monies being gifted by parents to children to complete property purchases will reach £5bn by the end of 2016. It’s estimated that these funds will have attributed to the completion of 25 per cent of all mortgage transactions during the year.
Such figures raise concerns around the sustainability of such borrowing, while also demonstrating the widening divide between those borrowers that can fall back on such support, to those without the financial backing that will have to continue struggling to raise the required funds to purchase their home.
As calls from industry experts for lenders to broaden lending criteria have continued in recent months, it is gradually becoming apparent that lenders are reacting. Halifax recently increased the maximum age at the end of a mortgage term to age 70 in all cases, which has been welcomed as a sensible approach across the mortgage market, given the likely hood that many borrowers will need to continue to work into their 60’s to secure a comfortable retirement.
Barclays released details yesterday pertaining to the introduction of the first 100% mortgage to the mortgage market, since the financial crisis of 2008. The arrangement is aimed to take advantage of the sector of the market where parental or family support is available, by using that security to leverage the mortgage funding without the gifting party completely parting with their funds.
Rather than a gift of a deposit being provided by the family member, Barclays will require the funds to be invested into a Helpful Start savings account for three years, which is linked to the mortgage and will earn interest of 1.5 per cent plus the Bank of England base rate during this period. Borrowers can secure finance of up to £500,000, against a fixed interest rate of 2.99 per cent.
The scheme aims to support more first time buyers to market, while providing security to the bank and the gifting party, as the 10 per cent deposit that is required acts as a mortgage guarantee for the lender and the family member continues to earn interest against their money while also regaining the funds at the end of the initial tie-in.
Some concerns around the efficacy of the scheme have been aired since the press release was issued by Barclays. Simon Butler, Associate Director for Contractor Mortgages Made Easy said: “It is surprising to see such a scheme coming back to market, given the critical damage that Northern Rock’s image took for previously lending this type of loan at the high point of the financial crash.
“The Mortgage Market Review added tighter controls on the affordability assessments of mortgage lenders, but it did not add any ruling to prevent this type of loan. In addition, Barclays can waive away any claims of reckless lending, as the deposited funds into the secured savings vehicle provide added security if anything does go wrong.”
Commenting on the potential for this style of lending to become widespread, Butler stated: “The majority of lenders are unlikely to follow suit, given that the vast majority have neither supported the Government backed Help to Buy schemes, nor introduced lending above 90 per cent at this time.
“The view that this type of borrowing helped to tip the balance in 2008 towards a wholesale market crash is likely to make many lenders think twice, before opening themselves up to the potential bad press that this form of lending could bring.”
Article By: Jon Hatfield, Senior Mortgage Consultant at Contractor Mortgages Made Easy
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