Barclays is the latest lender to look at providing an innovative solution to the single biggest problem facing many first time buyers, a big deposit. As the mortgage market has tightened, lenders have pulled away from offering mortgages to those with small deposits and only a handful offer mortgages to those with just 5% to put down.
As a result first time buyers need to typically amass at least 10% of the purchase price. In addition they can expect to pay a higher interest rate on their mortgage than a buyer with a bigger deposit.
Recognising that this is a big barrier to the success of aspiring first time buyers, Barclays is a significant addition to the group of lenders that have sought to address the problem. Rather than move back to the higher risk profile of 95% mortgages some mortgage lenders have looked to harness the help of parents in designing an alternative mortgage solution.
The Barclays Springboard Mortgage offers the chance for a first time buyer to borrow up to 95% of the purchase price, subject to their parent putting away a further 10% in cash. That cash acts as additional security for the mortgage but importantly remains in the parental names rather than having to be handed over as a gift to the child.
The savings account pays the parent interest at a rate of 1.50% above Base rate but the cash is not accessible during the first 3 years. Assuming the child meets all their mortgage payments in the first 3 years then the cash will once again be released to the parents.
Because the parental cash gives the lender more security, the mortgage rate (3 year fixed rate at 4.69%) is markedly lower than would be available on a straight 95% mortgage. However, it is not as low a rate as could be found on an 85% mortgage if the cash was given to the child to bolster their deposit.
This could be an ideal solution for parents that do have some cash that they want to help their child with but are not in a position to simply give it to them. It could really help where the Bank of Mum and Dad will need to assist not one but two or more children for example.
There are other lenders already operating in this arena with similar options from lenders like Lloyds and Market Harborough, although both require a larger amount of parental cash to be tied up. Others have adopted a slightly different tack and can use spare equity in the parent’s home instead of cash as the additional security. Lenders such as National Counties BS, Bath BS and Aldermore use this structure.
Many parents will no doubt continue to offer their children a cash gift but these deals are really useful alternatives. These deals may not herald a spate of mortgage deals aimed at those with small deposits but they are a sign of a more competitive market that is looking to provide practical options for first time buyers.