How the Bank of Mum and Dad beats stamp duty rules
Demand is surging for mortgages that allow parents to help their children on to the property ladder without triggering a stamp duty surcharge aimed at second homeowners, brokers and lenders said.
First-time buyers are increasingly turning to the Bank of Mum and Dad for help with saving for a deposit or qualifying for a home loan, as house prices remain high but tight mortgage affordability rules constrain borrowers.
However those who choose to help a child by buying jointly with them have risked being snared by the stamp duty surcharge on second homes introduced in April 2016. A parent who already owns one property and becomes co-owner of another faces triggering a three percentage point extra charge on the purchase.
Formerly a niche product on the market, so-called joint borrower sole proprietor (JBSP) mortgages allow borrowers legitimately to escape the surcharge trap, by allowing a family member to back a buyer financially without becoming a co-owner of the property.
Tony Fulbrook, head of purchase mortgages at Barclays Mortgages, which offers mortgages of this type, said: “It’s one way that we can help customers to buy a home by enlisting the income of another person, typically a parent, who will be party to the mortgage but not an owner of the property.”
Brokers said inquiries about this type of mortgage had substantially increased in the past year. Jonathan Harris, director at broker Anderson Harris, said: “We’re getting inquiries on a daily basis for this, as opposed to once a month before. It really is a popular product.”
Mr Harris gave the recent example of a client in her early 20s, earning £50,000 a year, who wanted to buy a property in London for £700,000. Her income permitted maximum borrowings of roughly £250,000, well short of the £600,000 she hoped to borrow. But when her father who earned £150,000 a year agreed to come in on the mortgage, his income made up the difference in affordability.
“It’s driven by the need for children to be able to hold property in their own name and also utilise the parent’s income,” Mr Harris said.
David Hollingworth, director at mortgage broker L&C Mortgages, said interest rates on the niche products were comparable to those elsewhere in the market and he anticipated further growth in the segment. But he warned that unless more lenders began offering this type of mortgage, rates might become less competitive. “Where it could cost you more is that you’re narrowing the field,” he said.
Reasons to take the option of a joint borrower sole proprietor mortgage predate the stamp duty surcharge, since any sale of a property bought jointly might cause a parent-owner with an existing home to be subject to capital gains tax on its sale. Keeping their name off the title deeds means this problem no longer arises.
Another driver for recent interest was the government’s decision in November 2017 to abolish stamp duty for first-time buyers of homes worth up to £300,000. With a joint purchase between an existing homeowner and a first-time buyer, the latter would be disqualified from the exemption — something a JBSP loan avoids.
The JBSP option is offered by a limited number of lenders, including Barclays, Metro Bank, CYBG and Hinckley & Rugby Building Society. Solid data quantifying the size of this niche lending market is hard to come by. UK Finance, which represents lenders, does not collect data on its volume or value.
One lender that has recently launched its own mortgage in the segment is the Family Building Society, which launched it last autumn after increased demand from brokers for this type of loan. Mark Bogard, chief executive of Family Building Society, said the lender had “felt the market demand” for the mortgage.
Nonetheless, he added that the lender turned down roughly half of applications, because either the relationship with the owner was not a sufficiently direct family connection; or the owner’s job was not one that was likely over time to generate an income that would allow them to afford the mortgage on their own.
Barclays offers an alternative type of loan called a Family Springboard mortgage. This allows a borrower to take a mortgage of up to 100 per cent of the value of the property (worth up to £500,000) as long as a family member or loved one provides a 10 per cent deposit with the bank.
Mr Harris said it was suited to higher-income borrowers with no deposit, and also got around the stamp duty surcharge problem. “It works quite well in London, where you tend to have higher earners.”