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Family Loans For First-time Homebuyers: What Are The Uk Housing Implications?
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To get on the property ladder, young Britons are going to "the bank of mum and dad." What does this adaptive financial strategy mean for housing development?
Much has been written about the difficulties that young working people have at buying their first homes in the UK. While the situation is exceptionally difficult in London, where a deposit of more than £100,000 is all but essential for a first-time purchase, home prices throughout the country have risen back to 2007 levels and higher. The reason so many younger people either rent or live at home with their parents is because bank lending standards are very tight and deposit requirements are very high.
But two organisations that track the state of housing in the UK - lender Halifax and Shelter, the housing and homeless charity - both report that first-time buyers increasingly turn to parents or other family members for loans or gifts. This reflects the increasing difficulty at getting on the property ladder for younger working people, but it also suggests that buying is not impossible.
For homebuilders and developers who are financed in the private sector - think joint venture partnerships that bring together consortiums of investors who recognise the high demand for housing - this is heartening news.
Across the UK, the average price for a home purchased by a first-time buyer in early 2014 was £192,000, meaning that the requisite 10 per cent deposit would run close to £20,000 (a poll by Shelter UK found the average parent-to-child loan was £23,000). This was a 10.5 per cent jump over the same time in 2013. For young people caught in the rent trap or whose slack wages simply prohibit them from saving that much, the options for getting a deposit by an alternative means include the following:
Below market-rate loans from family - Whether it be for a deposit or the mortgage itself, it’s not unusual for family members to make loans to each other. What’s highly recommended is that documents be drawn up to specify how the loan will be paid back and with what interest charges, if any.
Deed of trust - Using a solicitor, draw up a document that indicates how much you’ve loaned to your child (or niece, or grandchild, or family friend) that specifies how much you would be paid back if and when the borrower sells the home in the future.
Collateralise parents’ home - Raise cash with a secured loan against your home. This does risk the parental home if for any reason the borrower defaults on their loan.
Lifetime Mortgage (early inheritance) - This basically releases the borrower from debt with the parent at the time of the parent’s death with the sale of the parent’s home; of course, this complicates inheritances if there are multiple siblings.
Guarantor mortgage - With the mortgage lender’s agreement, the parent guarantees the loan, agreeing to cover mortgage payments should the homebuyer not be able to do so.
What is implicit is that the post-War generation, the parents of younger homebuyers, in each case are sharing their generational fortune with their adult children. For people whose parents are unable to provide any of these things - say, if they themselves have low incomes and live in private rental or social housing – these methods are largely unavailable.
What can alter this significantly is an increase in the supply of homes, building 200,000 residences per year instead of less than half that (as has been the case for the past decade). Financiers who make alternative investments in land, where planning authorities permit conversions to residential from (typically) agricultural land, are able to build near emerging employment centres. Given the state of housing expenses in London, entrepreneurs and other employers are locating away from the capital city to reduce labour costs.
Investors in the housing sector, both individuals and institutions, are clearly tapping into a high demand market. But individual investors should speak with an independent financial advisor to judge where an investment in housing, in UK land - or a loan to adult children - is most rational.
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