With the average house in London costing over £480,000, many would-be first-time buyers who’d love to start 2019 in a home of their own simply can’t finance a mortgage. Help to Buy and shared ownership, of great assistance to many, are not right for everyone.
But if your parents are willing for their income to be considered as part of your mortgage application, a Joint Borrower Sole Proprietor option may offer the chance you seek.
Unlike Help to Buy there is no deadline to meet in five years’ time, when equity loans must be repaid. And unlike shared ownership, you don’t have to juggle mortgage payments and rent.
Perhaps best of all, you can buy an older home — usually much cheaper than a new-build property.
Another bright spot is that first timers get stamp duty relief on homes less than £500,000. This can cut your tax bill by up to £5,000, perhaps making the difference in your ability to post a deposit on your first home.
Even so, many first-time buyers will still be short on the income they need to support a mortgage.
Will I have to pay stamp duty?
In the past, first timers bought jointly with their family so that their parent’s earnings could allow them to borrow more. But if your parents already own a home, this is no longer a good idea.
Not only will you lose first-time buyer relief, you will also face an extra three per cent stamp duty payable on second homes. This would see your stamp duty bill on a £450,000 home rise from £7,500 to £26,000.
“For first-time buyers, getting on to the property ladder can seem like an impossible challenge,” says Charles Morley, director of mortgage distribution at Metro Bank.
“Not only is there the obvious question of affordability, but also getting to grips with the process and all it entails.
“Joint Borrower Sole Proprietor (JBSP) mortgages allow close family members to support the affordability of the mortgage without them having to become legal owners of the property.”
How does the Joint Borrower Sole Proprietor mortgage work?
This means that parents’ or other family members’ higher salaries can be used to support lower incomes, without co-owning the property and eradicating the first-time buyer stamp duty relief.
Under these mortgages, the income of everyone on the mortgage is considered. So, if you earn £35,000 a year and your parents earn £25,000 each, you would have a total pot of £85,000.
On a four-times income basis, this could support a £340,000 mortgage — much more than the £140,000 you could stretch to on your own.
In London, that extra £200,000 could be the difference between owning your own home or remaining part of Generation Rent.
Unlike traditional mortgages, the age limit on JBSP mortgages can be as high as 80, allowing two generations of income to be assessed without making the term so short that the repayments become unaffordable.
There are capital gains benefits, too. If your parents are on your deeds, they have to pay up to 28 per cent of their share of the property’s increase in value when you sell. But if they are not on the deeds they do not pay this tax and it makes it easier for you to climb to the next rung on the ladder.
How to get a Joint Borrower Sole Proprietor mortgage
So why don’t more people know about these mortgages? Well, they used to be hard to find. They were largely the preserve of niche banks, often based outside London, and might have seemed a bit “exotic” to property newbies.
Now, offerings from Metro Bank, Barclays and a host of other institutions give Londoners choice and local face to face advice.
Independent legal advice for both parties is a must — and is often a condition of the mortgage.
These products exist because the first-time buyer generally can’t afford a mortgage on their own. Hopefully, in time their income and their equity in the house will increase, allowing them either to sell up and move on, or take on the mortgage themselves.
But if things go wrong, the close family member can be left with all the mortgage to pay and no authority to sell the property. Or if relationships deteriorate, it can mean a costly legal battle to get the non-owner’s name removed from the mortgage.
To help avoid such pitfalls, consider setting up a declaration of trust at the outset and register it against the property at the Land Registry.
And with a number of smaller, out-of-town banks still key players in this area, consider using a mortgage broker to ensure you get the best deal available.