I recently met a client who has hopes of purchasing a property, not just in the prime area of London, but the prime street. She knows the location well, as she currently rents in the same building as where she wants to purchase. There is no need to sell her the location or the flat, she’s already converted – with good reason. The property is in a premier location, in a block which has 24 hours porterage, and pin drop silence, in a close ended road.
The challenge she was having regarding obtaining a mortgage was one of income proof. Though earning a large income, partially due to personal income and partially due to family wealth, it wasn’t high enough to get her to the level she needed to get anywhere near the purchase price.
It seems this issue is not just an issue for the ordinary class of folks. Luckily for her, if required the family who are based overseas can provide backing if need be. The property would be purchased in the sole name of the client however the mortgage would be in the guarantor’s name as well as the client’s.
This is a relatively new concept in residential lending. The founder of the first bank to do this, as often is the case, noticed the gap in the market through his own trials and tribulations in buying his first home.
The average couple with an average income in London which is currently £37K would struggle to purchase a house.
Many of their parents have paid off their mortgages and are in a relatively strong position to provide a helping hand. This could be in the form of helping to increase the deposit or helping to boost their income levels. All lenders will want to know is where the deposit has come from, and if it is from other family members it will need to be provided on the basis it is a gift. This might be an awkward conversation depending on the circumstances.
Since this lender has broken the mould, many other lenders have entered this new space. Which, in essence, means the weight of purchasing a property is not simply on the shoulders of the individual buying it, but spread across the family members willing to help. This is of particular help to close nit families, notably Asians and Jewish.
The ratio of income to house prices has widened. In 1983 the average earning was £8,528, the average house price was £26,000, which comes to about three times the income. Currently, it stands at about nine times the income level. Hence the need for more innovative mortgage solutions.
As time goes on I expect more innovative solutions to come up within this space. Perhaps a hybrid of equity release from the parent’s home. This is a solution were the borrowers pays no monthly instalments, and repayment is only due on death and this is used to fund the new purchase, for the children. This could have benefits on the inheritance tax side as well.