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Joint borrower sole proprietor mortgages – the new guarantor mortgage.
Knowing you could afford the mortgage for the home you want, but being unable to get it, can be especially frustrating. Young buyers in particular often don’t have the necessary deposit, or have a professional income which is growing predictably, but not quite fast enough.
Traditionally, they have turned to parents to act as guarantors and lenders have long offered products specifically for them (on which more later). One product though – originally designed to side-step Capital Gains Tax (CGT) liabilities – has leaped in popularity, thanks to recent stamp duty changes.
Joint Borrower Sole Proprietor mortgages rely on income from more than one person, whilst not having everyone registered as the owners.They enable members of your family (usually a parent, occasionally a sibling, son or daughter) to support your purchase of a home, without their name appearing on the deeds. Historically, this mattered because your guarantor might otherwise be liable for CGT on their share of your home when you sell. To this first tax benefit, recent stamp duty rule changes, which apply only to the owner, have added two more. Firstly, when HMRC asks“Will the purchase of the property result in owning two or more properties?” if you can answer ‘No’, this avoids liability to the painful 3% second home surcharge. Secondly when HMRC then asks“Have you ever owned or part owned another property?” if you can again answer ‘No’, you will be eligible for first time buyer SDLT exemption (worth £5,000 at the £300,000 limit).
To the CGT and two SDLT tax benefits, one client this year impressed us by adding, in effect, another SDLT saving and more. As she explained:
“I realised that, with the bank happy to take my parents’ income into account, my price limit jumped from a one bed flat, to a small two bed house, i.e. the sort of place I’d been hoping to afford in a few years. Buying it now skips a whole move, so I avoid paying stamp duty again, I avoid a raft of other buying and selling costs – and enjoy my little house now, not later.”
What lenders look for
As a rule, lenders offering Joint Borrower Sole Proprietor mortgages like to see family relationships between those involved. They prefer to see an end to the need for a guarantor within four or five years. The classic scenario is parents of a recently qualified professional, whose income will follow a predictable and relatively steep, upward curve.
What kinds of income count?
Some lenders are surprisingly flexible here. In one recent instance, the lenders were happy to include the 5% annual gains being made, but not taken, by the £800,000 pension ‘pot’ of our client’s parents. In another case, the lender took a similar attitude towards the reliable performance of the parents’ investments which they allowed to accrue.
With 30 and 35 year loans, guarantor age can be an issue
Less flexibility tends to be shown on matters of age. Lenders prefer to see that the guarantors are statistically likely to survive the full length of the term. They will insist that dependence on income from guarantors will end within the period they are likely to survive.
Guarantor mortgage products
Standard guarantor mortgages – in which your guarantor offers their own home or cash as security – are suitable for some, though typically create a higher level of potential liability than necessary. They require sophisticated formulation and thinking-through, though. In practice, where the ‘joint sole’ route is not available, it is often more sensible and cost-effective for the guarantor parents (assuming they are the guarantors) to take out a separate mortgage on their house, to lend the money to their home-buying daughter or son.
Regardless of the eventual route, if buyer and guarantor can demonstrate that the required loan is affordable now and prudent in the longer term, the right product and lender can be found.
Your home may be repossessed if you do not keep up with repayments on your mortgage