Could There be a Ban on Savings Linked Mortgages?

by Mark Johnston

It seems that in the current climate life is tough for the average first time buyer and only those with squeaky clean credit histories and savings to put down a deposit can hope to get on to the property ladder.

The struggles facing first time buyers mean that many have turned to their parents for help raising deposits or for help to even qualify for a mortgage in the first place.

The good news is that helping with the mortgage no longer means having to actually pay the mortgage. As times are hard for the first time buyer and most parents are willing to lend a helping hand lenders have therefore been forced to design innovative schemes that write parents in to the home buying process with out it actually costing them anything up front.

These schemes include:

GUARANTOR MORTGAGES: most lenders offer a guarantor facility on their standard product ranges. These allow a parent to guarantee any shortfall in income multiples. For example; if a potential borrower earns £20,000 per annum, at 3.5 times a single salary they would qualify for a mortgage of £70,000 however if the property they wanted to buy is £120,000 then the parent would act as a guarantor for the £50,000 difference. With these particular mortgages instead of the guarantors overall financial circumstances being assessed savings and assets are considered.

FAMILY OFFSET MORTGAGES: so a traditional offset mortgage is when savings are kept in a separate account that is linked to a mortgage. The savings are then literally offset against the mortgage debt. With a family offset first time buyer mortgage, the product works in exactly the same way but a parent savings are linked to their child’s mortgage instead of their own. Either way however no interest is received on the credit balance held in the savings account.

Just recently however European Members of Parliament (MP) have voted to ban mortgages that are tied to other products like savings accounts.

The European Monetary and Economic Affairs Committee voted through a number of draft proposals. One of these proposals stipulates that lenders will not be allowed to sell mortgage deals linked to savings accounts where the account is not solely for the purpose of repaying the mortgage.

The Council of Mortgage Lenders (CML) does not see this particular proposal as a problem and has said “the European parliament version of the directive clearly allows tying savings products, but it is unclear if they are limited to those in the borrower’s name. This does not affect offset mortgages and if it does affect anyone it will be a small minority”.

The Building Societies Association (BSA) said of the proposals “our interpretation of this is that the proposal is referring to parentally guaranteed mortgages where the deal is partially guaranteed on the parent’s savings”.

However, both of these groups are seeking input from the Treasury and the Financial Services Authority (FSA) to see what they think it relates to.

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