Launch of the 'family mortgage': New plans will allow parents and grandparents to use their wealth to guarantee loans

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Parents, grandparents and other relatives will be able to combine finances
This will help secure and guarantee mortgage and reduce repayment costs
Home loans will make it easier for young to get on to housing ladder with deposits of as little as 5 per cent of property’s value.
Building society is first to be launched since Ecology in 1981

Published: 14:16 EST, 13 July 2014 | Updated: 14:34 EST, 14 July 2014

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A new ‘family mortgage’ that allows parents and grandparents to help out house buyers will be launched today.

The revolutionary home loans will make it easier for young adults to get on to the housing ladder with deposits of as little as 5 per cent of the property’s value.

Parents, grandparents and other relatives will be able to combine their finances to help secure and guarantee the mortgage and reduce repayment costs.

The 'family' mortgage is being offered by the Family Building Society which, as revealed by Money Mail, today becomes the first new building society to launch in the UK for more than three decades

But, unlike when children raid the so-called Bank of Mum and Dad to raise a deposit, no money is actually handed over.

Instead, wealthy relatives will be able to use their savings or their houses as security for the mortgage and bring down the cost.

The mortgage is being offered by the Family Building Society which, as revealed by Money Mail, today becomes the first new building society to launch in the UK for more than three decades.

Chief executive Mark Bogard said: ‘Young adults even with high paying jobs are struggling to meet the cost of living so they are either living in rented accommodation longer than ever before or are being forced to live at home. Thus they need help to get on the property ladder.

‘Our research shows that children would rather soldier on than take money out of their parents’ retirement pot. Our family mortgage gets buyers on the property ladder sooner and keeps family members in control of their money. And because it’s a formal arrangement everybody knows where they stand.’ The mortgage is available to buyers who can raise a 5 per cent deposit – or £10,000 on a £200,000 home.

Young couples wanting to get a mortgage will no longer have to apply to the Bank of Mum and Dad for a loan (or a gift)

Relatives must then provide security worth another 20 per cent – or £40,000 in this instance – to take the total up to 25 per cent.

They can do that by opening a savings account with the Family Building Society with the required sum deposited.

They then have the option of forgoing interest payments on the savings. In return, the house buyer only pays interest on the value of the loan minus the value of the savings deposited.

On a mortgage of £200,000, with a £10,000 deposit and £40,000 of savings held in a non-interest paying account, the borrower would only pay interest on £150,000.

The savings are still owned by the family member but cannot be reclaimed for 10 years.

A further option allows parents and other relatives who are asset rich but do not have spare cash to use their house as security.

For example, a parent could pledge £40,000 to help a buyer with a £10,000 deposit secure a £200,000 mortgage, but only pay up if the borrower defaults.

Crowded but at least it's home and being paid for

The building society said all three options can be used at once with multiple relatives taking part.
The society will also pay the buyer’s mortgage payments for six months if the borrower loses his or her job ‘through no fault of their own’.

Mr Bogard said: ‘We are here for the families in the middle.’

But sources at the building society said it does not expect an enormous level of take-up, with 1,000 such mortgages in the first year seen as a good start.

Other products include a ‘low start mortgage’ for couples who get divorced which offers stepped monthly payments which are kept at low levels for the first two years.

The last new building society to launch in the UK was the Ecology in 1981.