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September 29, 2012 12:08 am

‘Pensions for property’ plans slated

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Parents could soon have another way to help their children get onto the property ladder under proposals to use pension savings as security for their child’s mortgage, although the so-called “pension for property” scheme has received a very mixed reception.

This week, the Liberal Democrats revealed plans to allow parents to use part of their retirement savings to act as a guarantee so their children could secure a home loan.

The party wants the scheme to come into effect by April. The idea follows research showing that more first-time buyers are turning to their parents and other family members for financial help.

In 2011, almost 19 per cent of first-time buyer transactions would not have taken place without family financing, compared to 13 per cent in 2008, according to a report by the Centre for Economics and Business Research (CEBR) for HSBC.

The report estimates that the “bank of mum and dad” helped to finance more than 100,000 first-time buyers between 2008 and 2011, as securing home loans from banks became harder during the economic downturn.

“The deposit is the most crucial aspect of any property purchase and increasingly our clients are helping children or grandchildren on to the housing ladder by giving them the necessary funds,” said Jonathan Harris of Mayfair-based mortgage broker Anderson Harris.

Gifting a sum of money is one of the simplest ways to help a child secure a mortgage as it enables them access to a wider choice of mortgage deals.

Lump sum deposit

Current rules allow pension savers to take up to a quarter of their retirement fund as a tax-free lump sum, but typically this cannot be touched until the age of 55.

The government’s plan would allow this lump sum to be used to fund a “guarantee” for children who had not built up enough cash in the form of a deposit to get a mortgage.

Government officials are working with mortgage lenders and the pension industry on the plan, which they hope will be operating by Easter 2013.

But there was a cautious reaction to the proposal from advisers.

“Firstly, the value of people’s pensions many years’ hence is not guaranteed,” said Ros Altmann, director-general at Saga, a specialist in financial services for the over-50s.

“Secondly, most people will need their pensions to support them in retirement, or perhaps for later life care needs. Thirdly, borrowing against a future pension lump sum would be more expensive than taking the money out of the pension fund and using it directly.”

More lenders now require evidence that the money is gifted legally, usually a letter from the donor confirming that it is a gift, and that they have no legal interest in the property. According to Harris, NatWest is one lender that insists a deed of gift is drawn up, which comes at an extra cost for the borrower – or parent.

There are other ways for parents to help their children, without handing over large sums of cash. However, experts urge parents to seek legal advice as these options come with risks.

One option is for parents to take out a joint mortgage with their child. This can help increase the amount the child borrows as all incomes are taken into account.

In June, Barclays launched its Family Affordability Plan, which allows the borrower to take out a joint mortgage with their parents while keeping the property in the child’s sole name. This removes any potential capital gains tax issue for the parents when the property is sold.

David Hollingworth of London & Country, the mortgage broker, said taking out a joint mortgage is becoming more popular. However, he admitted there are drawbacks. Parents named on the mortgage are equally responsible for mortgage payments and if their child cannot make the payments the parents will be liable.

In a similar scheme, parents can become guarantors of their child’s mortgage, either by using their income or through the spare equity in their own home.

Several lenders, such as National Counties Building Society and Bath Building Society, allow people to borrow up to 95 per cent of the property’s value by taking a charge over the parents’ home.

This can result in cheaper mortgage rates for the borrower. For example, National Counties has a three-year fixed-rate at 4.89 per cent, with a £495 fee. A comparable standard 95 per cent mortgage deal has a rate of 5.49 per cent, with a £998 fee, from Melton Mowbray Building Society.

FT Money Show podcast

Listen to the FT Money team discuss ‘pensions for property’ on the FT Money podcast

Aldermore Mortgages offers a similar product, the Family Guarantee Mortgage, to allow borrowing of up to 100 per cent. It requires parents to guarantee any borrowing above 75 per cent loan-to-value with spare equity in their property.

As with the joint mortgage scheme, if the borrower fails to keep up with their payments the guarantor is liable for the value of the guarantee.

“With any of these schemes, parents and grandparents should seek advice, particularly if the lender is taking a charge over their property,” said Mark Harris of SPF Private Clients. “Depending on the details of the guarantee, they may be restricted from borrowing in their own right until the restriction is lifted so it’s important to understand what they are getting into beforehand.”

For those that do not want to hand over money to their children, using savings as security is an alternative option. Lloyds TSB’s Lend a Hand scheme allows borrowers to take out a mortgage with a deposit of 5 per cent, with their parents putting 20 per cent of the purchase price in a savings account with Lloyds as security. This enables the borrower to qualify for lower rates than a standard 95 per cent mortgage deal.

Under this scheme, parents have to lock up their money for a minimum of 42 months, but earn an interest rate of 3.7 per cent on their savings.

Simren Priestley, 24, who works in public relations, exchanged contracts on a studio flat in Wandsworth last Friday, which was bought through the Lend a Hand scheme.

“There is no way I could have done this without help from my parents,” she explained. Her parents put 20 per cent of the purchase price into the Lloyds savings account, and also helped her with her deposit.

However, some advisers are concerned that young adults are being encouraged to get into more debt that they can handle. Clive Fortes, a partner at actuary Hymans Robertson, warned that, with the rise of university tuition fees, there is a worry that young adults are being saddled with so much debt that they will spend most of their lives working to pay off their debts with little chance to save for their retirement.

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