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Brokers welcome inter-generational options but want more high LTV deals ‒ analysis

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  • 02/08/2019
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Brokers welcome inter-generational options but want more high LTV deals ‒ analysis
The increasing number of inter-generational products on the market has won praise from intermediaries, though they suggested that more innovation around high loan to value (LTV) deals and lending deposits would provide a further helping hand to first-time buyers.

 

Data released by Defaqto this week revealed that there has been a 40 per cent growth in inter-generational mortgages over the last two years, deals which involve a parent or grandparent offering some form of security deposit whether through their savings or their own property.

It found that in total there are 13 lenders now offering a form of inter-generational mortgage, and this follows a report from the House of Lords back in April which suggested the FCA had a “key role to play” in promoting the development of more inter-generational deals.

Handing over the deposit instead

David Sheppard, managing director of Perception Finance, said he has not seen a huge demand for this sort of mortgage of late, and suggested this may be a result of parents and grandparents feeling more comfortable simply gifting the deposit.

He continued: “We have also seen a few family members look to lend the money for the deposit and use NatWest or Santander for their flexibility in this regard. This is an area that could benefit from a bit more competition from other lenders in my view.”

Sheppard called for more lenders to provide a family offset mortgage, where the borrower still puts down a traditional deposit, but the parents can link their savings pot with the child’s mortgage in order to reduce the balance upon which interest is paid.

He continued: “The money could be ring-fenced from the borrowers and instantly available to the parents should they need it, but would reduce the term of the mortgage with lower interest charged, which would be especially good with some clients taking longer term mortgages these days.”

 

Family support can be stretched

David Hollingworth, director at L&C, said these were “really useful products to have”, though noted that gifting a deposit remained the main way that parents will look to help their children get onto the ladder.

However, he added: “Rather than gift the cash, these products are a way for parents to help their child achieve their aim but retain ownership of the money. With multiple children, that might help at a later date.” 

Hollingworth highlighted that the options around joint borrower, sole proprietor have “gained a bit of momentum” as another way for parents to help, due to the additional rate on stamp duty. 

 

What about high LTV deals?

Sebastian Riemann, financial consultant at Libra Financial Planning, suggested that more high LTV deals, coupled with a cooling of house prices, would be more effective in helping first-time buyers than inter-generational deals.

However, he noted that there has already been a “significant increase” in high LTV deals, with lenders taking reduced margins. 

“I’m not sure there is much scope to improve on these further. You could find that irresponsible positions are adopted by some lenders similar to what we saw in 2006/7. If there is no profit in offering particular rates or the risk taken to accommodate these is too high you simply end up building an unsustainable bubble yet again.”

Perception Finance’s Sheppard agreed that high LTV deals would be more helpful, but admitted: “I do not think there is much interest to go higher than 95 per cent LTV in the market right now, especially with the added regulatory burden this would bring to lenders”.

L&C’s Hollingworth noted there was a “good selection” of rates up to 95 per cent LTV now, but added: “So often the case is they can only afford to borrow so much, and the deposit they need then gets bigger as they are trying to bridge the gap with the purchase price.

“That’s where you still have parents often intertwined with the aspiration of the child to buy.”

 

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