In this article, I discuss how you can get a mortgage with children and the different complications involved in the process reviewing the different possible solutions that are currently available to would-be Mortgage holders.
The Topics range cover property ownership with children and how mortgage affordability can be affected by children.
To simplify matters I have bite-sized this vast and detailed subject into frequently asked questions under two headings: Ownership and Affordability.
The answers to the frequently asked questions are “general” and are to serve as information. For full advice on your individual circumstances please use the Contact Form on this website.
Frequently asked questions on mortgages with children, this is split into two Sections
OWNERSHIP: Mortgages with children
If the mortgage applicants income justifies running two households then a second home is a simple way of buying for children or parents. You will probably need at least a 15% deposit.
This used to be prevalent in the 1980s. A parent would effectively agree to step in should their child struggle to make their mortgage payments. The bond was normally strengthened as the Parents were known to Building Society Branch Managers and probably had their own mortgages and savings with them. This still exists in diluted form and is normally reserved for children with defined career paths such as “trainee professionals” whereby the earnings do not currently justify the level of borrowing but they are almost certain to within the next 5 years.
Helping children on the property ladder has been a mainstay society problem. The Government has provided Stamp Duty relief for first time buyers to make homeownership more accessible however house prices are still often out of reach. There are some Mortgage Lenders who have recognised the need for the “Bank of Mum and Dad” to be included in the mortgage application. They will be equally liable as their children for the mortgage payments, however, they will not go on the title deeds, and this enables the first time buyer tax incentive to be protected (professional tax advice should be sought). As a side, in most cases, the Mortgage Lender will not allow the parents to live in the said property.
The joint borrower sole proprietor proposition also extends to next time buyers and buy-to-let mortgages.
Placing property in a trust may receive tax implications so you should first talk through this step with a professional tax advisor.
Residential property left to children as “beneficiaries” is often when the parent’s life ends. This normally means the property is unencumbered i.e. mortgage free so mortgages rarely collide. Where there are multiple beneficiaries one child may decide to buy the others out using a mortgage. This can only happen when they reach the age of 18 years.
Trusts that are ongoing or newly formed are free to buy investment properties i.e. buy-to-lets and it could be a good way to diversify their assets. The Trustees will be the mortgage applicants. Specialist Mortgage Lenders will be required as the level of expertise to underwrite moves them outside of mainstream commoditised lending. The result is the process will need manual intervention and the interest rates higher to reflect the complexity and less competition.
One way effective way of passing buy-to-lets down the generations in to form a limited company ahead of the purchase. The directors typically will be the parents and children minority shareholders. The children in this instance can be minors i.e. under the age of 18 years.
If you own the property in your personal name and are looking to transfer this to a limited company structure for succession planning; it is likely you will need to switch lenders and this is effectively a “sale and purchase” rather than a “remortgage”. As such there will be tax implications.
Any person over the age of 18 years can potentially buy a property using a mortgage. Some Mortgage Lenders allow up to 4 applicants and take all of their earnings. This could be two parents and two children; four siblings or any combination.
I would also add some Mortgage Lenders who have a minimum age of 21 or 25 years old.
Firstly you need to ask whether this is necessary. Normally if the mortgage term finishes before the eldest applicant reaches the age of seventy it is a non-issue and a fair number of Mortgage Lenders will go to seventy-five.
But in answer to the question then “yes” there are Mortgage Lenders that will ignore the parent’s age provided the child could afford the borrowing in their own right. The status of all the applicants (parents included) must be good enough to qualify for a “high street” bank or building society i.e. no major past credit issues. If this is the case then their Mortgage Lenders will lend to the eldest applicant’s eightieth birthday and then a tiny proportion that have no age limit for the parent.
Just to add the maximum mortgage term is typically 35 to 40 years.
AFFORDABITY: mortgages with children. Will having children affect my mortgage affordability?
When you have children and are looking to apply for a mortgage solely in your name children under 16 years (and normally 18 years) are seen by the Mortgage Lenders as a drain on your resources.
Many lenders build intolerance to allow for two children with relatively little impact on affordability. Above this number and maximum mortgage can drop sharply.
If you can evidence the child lives at home and is over 18 years but is in full time employment i.e. financially independent then the Mortgage Lender may dismiss them from their calculations.
Nursery fees are treated as a deduction by nearly every Mortgage Lender in the land. In fact, I’m only aware of one that doesn’t. If you are entitled to “Free hours” from the State this will offset the cost deduction accordingly. If the child is six months away from starting school then the Mortgage Lender may ignore the commitment.
School fees will be seen as a commitment.
The vast majority of Mortgage Lenders will factor in child benefit as usable income for mortgage purposes.
However, they normally limit this to parents who earn up to £50,000 rather than burden their Underwriters to work through the taper relief above this point.
Also although child benefit can continue to cover children up to the stage of approved higher education or training Mortgage Lenders typically stop using the payments at age 16 (the default position for the scheme) and some as early as age 12 to demonstrate to their respective Risk Department the income is sustainable for a period.
This is an add on to Working Tax Credits for parents. Not all Lenders take this benefit.
This is segmented into two distinct categories:
Maternity pay such as from employers or statutory pay from the State.
This is taken by most Mortgage Lenders. If you are returning to work on the same terms the standard position is to look at payslip before you stopped work. Depending on the Mortgage Lender they may ask for the applicant to confirm the terms are to be unchanged in writing. Other Mortgage Lenders want the employer to confirm the same which can be impractical if the return to work interview has not taken place. There are even some Mortgage Lenders who want evidence of savings to cover the shortfall between pay and the mortgage payments for the period you expect to be off. Others want the expected return date to be within 6 months.
Paternity operates in the same way but is usually a shorter period so less of an issue to the Mortgage Lender.
Maternity allowance for those not eligible for statutory maternity pay.
For example unpaid work for a partner’s firm. This is highly unlikely to be usable.
I have yet to come across a Mortgage Lender that takes this. It does not mean there is not one but it is highly unlikely.
The monthly payment will be treated as a commitment. If there is not a set amount on a court order the Mortgage Lender will normally average the last three months payments seen in bank statements to determine how much you pay.
The children will not need to be entered as “dependents” on the mortgage application as this would effectively be “double-counting” the costs.
If the maintenance was simply a “voluntary arrangement” and can be demonstrated to have ended then it is likely to be ignored. Likewise, if the arrangement is six months from finishing i.e. children have grown up so it will no longer apply.
You are likely to need to show a six month track record. Most Mortgage Lenders will also want this on a court order. The age of the children will also have a bearing on usability.
WE DON’T HAVE TO MEET YOU
We can deal with all our clients by Phone, Whatsapp, Skype, Email and Post.