Should you help your kids onto the property ladder?

While the financial sector has been through the wringer in recent years, the bank of mum and dad has boomed. More and more young adults rely on their parents to get them out of financial bother, house them well into their thirties and give them a helping hand onto the property ladder.

According to the Council of Mortgage Lenders, a massive 80 per cent of first-time buyers receive some help from friends and family to buy a property, often in the form of a lump sum for a deposit. But if you don't have thousands of pounds to give to your children, or don't want to, is there another way to help them onto the first rung?

Stand as guarantor

Guarantor mortgages allow parents to put up extra security against their child's mortgage, allowing them to borrow more than they would be able to on their own - perhaps four times their income instead of three.

Some guarantor deals allow the parent (or other relative) to put up a portion of the necessary income. So if your child is able to borrow £90,000 you could stand guarantor on another £30,000 for example, meaning they could get a total mortgage of £120,000.
Nationwide subsidiary, The Mortgage Works (TMW) recently launched a wide range of guarantor deals that allow parents to opt for this partial liability option, as well as some full liability products. Deals start at 2.49 per cent for a two-year tracker with a fee of 2 per cent of the loan, but these deals are subject to change.*

Other guarantor lenders require parents to be able to cover the entire mortgage amount with your income, minus your own financial commitments.

They are niche products and not every lender has a guarantor deal. In addition to the large TMW range, The Co-operative Bank offers a fee-free guarantor mortgage fixed for three years at 5.94 per cent, and a handful of building societies offer the deals.

How do they work?

Your child makes all of the monthly repayments but, as a guarantor, you agree to cover them if they can't. It's a back-up policy for the lender in case your child defaults on their mortgage.

If they can't pay you will be legally liable for their debts and, depending on the deal, you will have to pay what is owed on either the portion of the mortgage you guaranteed, or the entire sum.

The lender will usually contact the borrower in the first instance to try to agree a suitable arrangement to repay the debts, but if they still cannot pay you could become liable for the loan.

Because of this you should not stand guarantor on your child's mortgage without seeking independent legal advice.

The Co-op and TMW both undertake full affordability assessments on the child and the parent before they agree to lend. But make sure you understand your liability as a guarantor if your child fails to pay their homeloan.

Different approach

Last month Halifax dropped its guarantor mortgage citing a lack of demand, but it offers a different take on the model via sister lender Lloyds TSB.

The Lend-a-Hand mortgage allows first-time buyers to get a mortgage with just a 5 per cent deposit as long as a parent, friend or relative puts savings equaling 20 per cent of the property's value into an account with the bank to act as security.

In addition, some offset mortgages give you the option to offset your own savings against your child's mortgage, sacrificing the interest you would have earned to help reduce their debt more quickly. Newcastle and Yorkshire Building Societies both have this ‘family offset' facility.

Parents are increasingly stepping in to support their children onto the first rung of the housing ladder. But if you don't fancy handing over your life savings for a deposit, guarantor mortgages and similar schemes offer a practical way to give your kids a helping hand into homeownership.

*Rates correct as at 7/4/2010