Buying a house from a family member can be a great way to invest in property, but there are certain things to consider before taking the plunge.
According to a recent report by Legal & General, a record number of people are expected to buy houses from family members in the UK in 2023. The report estimates that relatives will support 318,400 UK property purchases this year, including 47% of all those involving buyers under the age of 55.
This trend is likely due to a number of factors, including the rising cost of housing and the difficulty for first-time buyers to get onto the property ladder. Family members can provide financial support in a number of ways, such as by gifting deposits, providing loans, or helping with the cost of stamp dutyA tax paid by the buyer when purchasing a property..
There are a number of benefits to buying a house from a family member. For example, it can be a way to get onto the property ladder more quickly and easily, and it can also be a way to get a good price on a house. However, it is important to be aware of the potential risks involved, such as the possibility of family disputes or tax implications.
In this article on buying a house from a family member in the UK, we will explore this topic in more detail and answer frequently asked questions.
Getting help from a family member while purchasing a house is common, and many people opt for a family mortgage. This is when a family member lends you money to buy the house, with the intention of being paid back over time.
The most important thing to remember when considering a family mortgage is that both parties need to be clear on the terms of the loan. Make sure that you have an agreement in writing which outlines exactly how and when payments are to
Parents and family have helped in several different ways – by giving a financial gift, for example, providing a loan, standing as a guarantorA person who guarantees to repay a mortgage if the borrower ... on a mortgage, or becoming co-signatories to a joint mortgage.
But the mortgage market has also responded to this upsurge in financial help from a family member by devising specialist mortgages, especially for first-time buyers.
The family springboard mortgage
As mortgage lenders have cottoned on to the capacity for families to help younger members buy their first home, the new products now offered by some of those lenders go by various names, such as family boost mortgage, family deposit mortgage, or family springboard mortgage, depending on the particular lender.
What makes these mortgages different is that they typically involve a special, linked savings account into which the parents or family members make their contribution.
The amount of savings then typically needs to reach at least 10% of the purchase price of the first-time buyer’s home. Provided the savings remain in the account for the next five years, the lender treats the money as security against the possibility of the homebuyer defaulting on the mortgage repayments.
Using a family deposit mortgage in this way gives the lender sufficient confidence and security to extend a full 100% mortgage to the homebuyer – so avoiding the need to scrimp and save for a deposit.
Take the example of a £200,000 home bought with a 100% mortgage and no mortgage deposit by the first-time buyer. Security is provided by £20,000 (10% of the purchase price) in a special savings account for at least five years.
At the end of that time – provided the mortgage payments have been maintained – the £20,000 savings are returned to the “helpers” with interest accumulated over that period.
How much can I borrow on a family mortgage?
Lending criteria naturally vary from one lender to another, but some may lend you up to five and a half times your income if you are above a threshold of £50,000 a year (on a single or combined income). For incomes less than £50,000, the maximum loan might be reduced to four times the annual household income.
Of course, the affordability of the mortgage will also need to be checked, as well as your other financial circumstances, to ensure you can comfortably afford the monthly mortgage payments.
How can I find the most appropriate deal?
The concept of family member mortgages is relatively new, and by no means all lenders will yet have suitable products – or products that are flexible enough to meet the specific needs and circumstances of you and your family members.
The detailed workings of different family member products are also likely to vary from one lender to another – not least, for example, the savings rate of interest that can be earned on the savings that are being used as security for the mortgage.
To identify those lenders currently offering family mortgages, the most attractive mortgage rates, and to assess the relative merits of competing products; therefore, you might want to consult your mortgage broker.
Getting a mortgage with the help of a family member or members is common but comes with its own complications. It’s important to go in with your eyes open and make sure you’re getting a mortgage that is right for you.
If you’re interested in finding out more about this kind of family mortgage, your first step should be to speak with a local qualified mortgage adviser. They’ll be able to discuss your individual circumstances and identify the best lender for you.
Frequently Asked Questions about Buying a House from a Family Member in the UK
Q1: What is stamp duty, and how does it apply when buying a house from a family member?
A1: Stamp Duty Land Tax (SDLT) is a tax on property purchases in England and Northern Ireland. When buying a house from a family member, you may still be liable for stamp duty, depending on the sales price and whether it’s a concessionary purchasePurchasing a property at a discounted price due to certain c.... It’s crucial to seek legal advice to understand your obligations.
Q2: Do I need a real estate agent for a property purchase from a family member?
A2: While it’s not mandatory to involve a real estate agent, professional advice can help ensure a smooth real estate transaction. An estate agent can provide a fair market valuation and guide you through the process.
Q3: What are the potential tax implications, such as inheritance tax, when buying a house from a family member?
A3: Inheritance tax may apply if the family member selling the house passes away within seven years of the transaction. Additionally, there could be potential tax implications on rental income if you plan to rent out the property. Consult a financial adviser for tailored advice.
Q4: Can I apply for a joint mortgage if buying a house with an adult child?
A4: Yes, a joint mortgage is an option when buying a house with an adult child. However, mortgage providers will assess eligibility criteria, including income ratio and financial commitment, for all applicants. It’s advisable to seek mortgage advice specific to your individual circumstances.
Q5: What is a gifted deposit, and how does it affect my mortgage application?
A5: A gifted deposit is a sum of money given by a family member to help with the house purchase. This can affect your mortgage application as some mortgage products may have specific conditions around gifted deposits. Consult a mortgage adviser for guidance.
Q6: What is a guarantor mortgage, and is it suitable for buying a house from a family?
A6: A guarantor mortgage allows a family member to guarantee the mortgage repayment. It may be suitable for those who don’t meet standard mortgage eligibility criteria. However, it’s essential to get mortgage advice to understand the mortgage rate and terms.
Q7: What are the legal implications of a purchase agreement when buying a house from a family member?
A7: A purchase agreement outlines the terms of the property sale, including the house price and any additional costs like closing costs. It’s crucial to seek legal advice to ensure the agreement is fair and legally binding.
Q8: What is equityThe difference between the value of the property and the amo... release, and how does it relate to buying a house from a family member?
A8: Equity release allows homeowners to access the equity in their property. If a family member is selling you a house, they may use equity release to settle any outstanding mortgage. Consult a financial adviser for professional advice.
Q9: What are the maintenance costs involved in a property purchase from a family member?
A9: Maintenance costs vary depending on the condition of the property. A structural survey can provide insights into potential costs. Budgeting for maintenance is an important financial commitment to consider.
Q10: What is a buy-to-let mortgage, and can it be used for buying a house from a family member?
A10: A buy-to-let mortgage is designed for properties intended to be rented out. If you’re planning to generate rental income from the property you’re buying from a family member, this type of mortgage may be suitable. However, it’s essential to consult a mortgage adviser for specific mortgage options tailored to your needs.