This is the latest in a series of guest blogs from the insightful David Forsdyke, Later Life Finance expert at Knight Frank Finance. Here he explains how grandparents are making a real difference to their grandchildren when it comes to their first property purchase.
Let’s say you have a granddaughter who is 26 years old and is looking to buy her first home at £500,000. She has done well in her early career and has saved up over £50,000 herself, so can put down a 10% deposit. She graduated with a Masters degree 3 years ago and secured a good job. Her income is already looking healthy, so can comfortably afford to pay around £1500 per month for a mortgage.
She would like to lock in to a fixed rate for the next 5 years and have some stability. The problem is, 5 year fixed rates are currently around 3%*, meaning she’ll pay £1800 per month if she spreads the mortgage term over 35 years, on a capital and interest basis. This is a bit more than she’s comfortable with, but doable at a stretch.
Talk to the Grandparents!
Now let’s take the same scenario but after a conversation with you, her grandparents. You would like to help if you can, but perhaps you don’t have significant savings available, or your assets are tied up in other things. Let’s imagine you own your house and it’s worth £900,000 and you have no debts (lucky you!). You are financially comfortable with good incomes. Using a lifetime mortgage fixed below 2.5%* for life, you could raise £50,000 which you gift to your granddaughter, giving her a very welcome helping hand. You can even set up a reserve facility to help her younger siblings in the same way when their time comes.
Your granddaughter now has £100,000 from her savings and your generous gift. She’s got a 20% deposit, and an 80% mortgage is considerably cheaper, at around 2%*, which would lower the cost to around £1380 per month on a capital and interest basis. She offers to use the remaining £120 of her monthly £1500 budget to pay some or all of the interest on your new mortgage (£50,000 at 2.5% is just under £105 per month) so you don’t have to let the interest roll up, or worry about paying it yourself. If things keep going well for your granddaughter, she could be lucky enough to see her income rising, and may well accumulate wealth of her own to pay back the capital you borrowed for her over the next 10 year, as most lifetime mortgage lenders now allow overpayments of at least 10% each year without incurring any penalties.
This simple example shows that grandparents can not only help with the purchase, but can reduce the overall costs involved.
How we protect you as Grandparents
This all sounds great, but what are the downsides? If this has got you thinking about raising money to gift to younger generations, it is important to consider carefully the long term implications, and the impact on other areas of your finances. A lifetime mortgage cannot be bought direct from a lender. Because it is a form of Equity Release it comes with a thick layer of consumer protection from both the Financial Conduct Authority and the Equity Release Council. This protection includes the need to take advice from appropriately qualified advisers who will look at all the advantages and disadvantages, as well as exploring all the options and alternatives.
You should always make sure you get a detailed explanation of how the mortgage works. A lifetime mortgage allows interest to roll up. So unless you choose to pay the interest for them, the mortgage will gradually get bigger over time and this may reduce the value of your estate.
A discussion about the future also forms part of the advice, to make sure you have thought about what you might need if, for example, your health deteriorates and you need to cover the cost of care.
Here at Knight Frank Finance, we are not tied to any providers. We are members of the Equity Release Council, and follow a comprehensive advice process. We will research and find the most suitable products from the whole mortgage market for you, and we have mortgage experts too who can find the right mortgage for your grand children!
*all interest rates quoted are indicative only and may not be suitable for you as grandparents. The choice of interest rate and product terms will depend on your circumstances, the value of the properties involved and the amount of the mortgage. Before you make a mortgage application, we will carry out a full review to establish needs and preferences, and discuss all the pros and cons. If you meet the criteria, and wish to go ahead, we will give advice and make a recommendation to you.
David runs the Later Life Finance team at Knight Frank Finance and is a recognised expert in this field. If you would like to talk to David or a member of his team please get in touch by email email@example.com or by calling 01483 947764.