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How to talk to clients about intergenerational lending – Marketwatch

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  • 06/02/2019
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How to talk to clients about intergenerational lending – Marketwatch
Intergenerational lending may be a valuable option to support first-time buyers, after Lloyds Bank launched its 100% LTV mortgage at 2.99% fixed for three years.

 

Under the ‘lend a hand’ deal, parents or other family members are required to put forward cash worth 10% of the loan. The money is kept in a savings account that pays 2.5% interest and is returned after three years as long as the mortgage repayments have been met.

However, the product is not available to brokers yet, making the discussion with clients more problematic.

We asked this week’s Marketwatch panel how easy it is going to be to liaise with clients and what the risks are.

 

Maxim Cohen, chief executive of The UK Adviser

Intergenerational lending is not a new concept. Families have always helped younger generations get on to the property ladder and make significant purchases, however, lenders are creating a new suite of products which allow families to support their children through different criteria.

Lloyds Bank’s newest product has grabbed headlines as it signals the start of 100 per cent mortgages again, which were last seen in 2006, although it is caveated with parents having to stump up 10 per cent per cent of the value, so technically it is not a 100 per cent loan.

This particular product ties up the 10 per cent parental contribution for three years although, interestingly, it is only required to be kept in a savings account, which will still pay 2.5 per cent interest during the saving term.

Financially, this type of product makes sense as parents and grandparents can share their money with their offspring now rather than after their death, meaning they face a lower inheritance tax bill.

There is a generational wealth gap in the UK, as those who bought their home 25 years ago have experienced a 20-fold increase in value.

The product from Lloyds Bank allows parents who have secured their children’s mortgage access to their money after three years, allowing them to continue to secure their own future, as well as that of their children’s.

We expect to see even more products which allow parents to support their children and fulfil their home-owning ambitions in the coming years. With every product that comes to market we will assess its viability before adding it to our panel and offering it to our clients.

 

Jonathan Clark, mortgage partner at Chadney Bulgin

These are relatively complex products and ideally, both the applicants and the relatives providing the lump-sum would all need to be present at a face-to-face meeting in order to fully explain the potential pitfalls.

The biggest concern for me with house prices currently faltering would be the possible lack of an exit strategy after the initial three years. Lloyds says they will offer customer retention products, but if there is little or no equity in the property at the time, they could be at the mercy of the lender. It could also prove impossible to remortgage away, and customers to suffer a payment shock as a result.

There will always be risks associated with purchasing a house, but many younger people do not always recognise these, particularly as house prices have generally risen since the financial crisis and the spectre of negative-equity is a distant memory.

All risks would need to be explained thoroughly and the relevant protection products covered in detail where relevant.

Past-experience with similar products tells me that although they stimulate a lot of interest/press comment, take up levels are relatively low and most of these will be transacted directly with the lenders in branch, rather than by mortgage brokers.

This type of product will undoubtably be suitable for more financially astute first-time buyers and their parents. However, with such competitive 95% mortgages now being readily available from an increasing number of lenders, parents seemingly happy to assist with a deposit, as well as the current favourable stamp duty treatment, I believe that its likely to have only a very limited effect on the market.

 

Malcolm Fitchett, national business development director at Platinum Options

Having seen the Lloyds product of course any news that can potentially help first-time buyers enter the housing market and get the housing market moving can only be good news.

In my view, it is disappointing that this has been launched down the direct channel particularly when the majority of residential mortgage transactions come through the broker market.

It is a relatively easy product to discuss but many parents do not wish to tie up their savings for a minimum of three years and they have to be aware of the risks in the event of default on payments by the FTB which may not be under their control e.g. redundancy, sickness or divorce.

Many FTBs will welcome the potential assistance of entering the housing market. We find many FTBs save hard to get together at least a 5%-10% deposit which then opens up other options such as Help to Buy, schemes already available such as The Family Mortgage from the Family Building Society where there is greater flexibility by way of parental support from savings or a property charge or Joint Mortgage Sole Ownership whereby the parents can become party to the mortgage to assist affordability but the property conveys into the name of the FTBs only thus avoiding any additional stamp duty.

The 100% mortgage is a welcome return to the market but both the FTBs and parents will need to be fully aware of the implications and should seek independent legal advice before proceeding.

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