Research reveals rise in intergenerational mortgages

The intergenerational mortgage market has grown significantly in recent years and now offers some of the most competitive interest rates, according to new research.

There are 28 intergenerational mortgage products available on the market today, a rise is 40% in two years, according to the research from financial information business Defaqto.

Some 13 providers now offer some form of security deposit mortgage, compared to eight providers two years ago. Intergenerational mortgages are where one person, usually a parent or relative, offers a guarantee to help a borrower get a mortgage.

Traditionally ‘guarantor’ mortgages have been the most popular, where the parent or person guaranteeing the mortgage promises to pay back the loan if the borrower cannot. However, ‘security deposit’ mortgages available offer the parent or guarantor a less risky way to help the borrower afford a home and, in some cases, profit from it too.

With a security deposit mortgage, the friend or family member helping (helper) only guarantees the deposit or a set amount and is not liable for the whole mortgage. For example, they could guarantee £20,000 for a 10% deposit on a property worth £200,000. If the borrower does not keep up the mortgage repayments and the debt is called in, the family member is only liable for the £20,000 deposit and not the remaining £180,000 loan.

There are three types of security deposit mortgage available on the market. Collateral charge is where the helper gives a charge over some of the value of their home to provide security for the mortgage. For example, they could guarantee £20,000 against the value of their own home, without having to pay anything.

A linked savings deposit is where the helper has savings equivalent to the value of the deposit, e.g. £20,000 and is willing to tie these up as security for the mortgage. The helper would deposit their savings with the mortgage lender and would still receive interest on the deposit for a fixed period at the start of the mortgage, typically three to five years.

And an offset savings deposit, which is similar to linked savings deposit mortgages, except here the interest earned on the savings is used to offset the mortgage interest. The helper would receive no interest on their cash and the borrower would benefit from a lower interest rate.

Analysis of all the mortgage products on the market shows that the mortgage interest rates available on intergenerational mortgages are now some of the best available on the market for first time buyers.

The interest rates on security deposit mortgages are comparable with some of the best buy products for first time buyers with the lowest five year fixed rate on the market at 2.75%.
Linked Savings mortgage products offer better interest rates then mainstream savings products 2.50% vs 2.32% if money is invested for three years.

Defaqto recommends those considering an intergenerational mortgage seek legal advice first.