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Disadvantages of helping people with their mortgage

ended 07. March 2023

Newspager Riz Malik said this morning he thinks a good mortgage article would be one that focuses on the potential disadvantages and downsides of people rushing to support their relatives by committing to pay a part of their mortgage and/or deposit via a joint borrower, sole proprietor mortgage — or any other mortgage structure that can have tax and/or financial implications, e.g. reducing the relative's own available credit, resulting in a CGT bill). He also thinks it could be a Consumer Duty timebomb further down the line if relatives or friends somehow lose out, e.g. due to house prices falling or a breakdown in relations. He says he always recommends people seek independent legal advice when entering into these arrangements but, in your experience, is everyone going into them eyes wide open? What are the downsides that relatives or friends need to be wary of before they sign on the dotted line? In short, what are the risks?

8 responses from the Newspage community

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Riz MalikVerified
Independent Financial Adviser at R3 Wealth
While assisting a family member or friend with a mortgage may appear to be a noble act, there are potential consequences to consider. You usually become jointly and severally liable for the debt if you take out a joint mortgage with someone else. This means that if your loved one is unable to make mortgage payments, you could be held liable for the entire amount owed. Furthermore, late or missed payments will have an impact on both parties' credit scores. Because lenders consider the total amount of debt you are responsible for, including joint liabilities, having a mortgage may have an impact on your future borrowing capacity. Seeking independent legal advice before becoming a co-borrower is critical for understanding the legal and financial implications and you should proceed with caution until you have done so.
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Emma JonesVerified
Managing Director at Whenthebanksaysno.co.uk
Interesting point. I’m not sure this is a ticking time bomb for consumer duty (provided independent legal advice is sought and encouraged by the lender) but I do see that rushing to help a first time buyer that has no history of paying debts could be opening the helping borrower up to credit issues if the mortgage isn’t kept up to date. This is why both borrowers are affordability tested when becoming party to the mortgage, therefore the financial burden is jointly shared even though they don’t both share the property ownership. You should always get legal advice when entering any type of mortgage where you are liable for the debt and have no ownership of the property. We all love our children but the love for our children can sometimes cloud our judgement!
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Rohit KohliVerified
Director at The Mortgage Stop
We want more innovative solutions to help people come into the property market but that also comes with a responsibility for us, as advisers, to understand the products and their features (both positive and negative) and ensure we provide the right advice for all parties concerned and highlight the possible issues - which include what happens if there is a family disagreement. Independent legal advice is always a must in these types of mortgages, and we should emphasise that it's important to consider this advice and that it's not just a tick-box exercise.
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Scott Taylor-Barr0
Principal Adviser at Barnsdale Financial Management
It is an area of lending that has the potential to cause a lot of problems if the relationship breaks down, or one person's expectations of how things are not aligned with the others, so having a robust and frank conversation with all parties is key from the outset. Paint a picture of what could potentially go wrong and make sure they understand the obligations and issues that arise from this type of help. Independent legal advice is a must and many lenders will insist on this too, quite rightly.
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Thomas Collier0
Advising Director at Advantage Financial Solutions
Joint borrower, Sole Proprietor mortgages are a great family support solution, be it parents helping kids or vice versa. Some innovative new lenders have even spawned as a result of JBSP. There’s no CGT consideration with a JBSP mortgage as the ‘joint borrower’ never owns the property, simple. It’s conditional to receive independent legal advice which adds comfort to everyone involved, including the broker! When it comes to gifting money, no legal advice is required. Often a letter attributing the money as a gift without any kind of reservation is all that’s asked for. When it’s immediate family, there’s little a solicitor is going to say that will change a parents decision. If it’s a friend, the broker really should seek the full picture. Lenders can still accept trust deeds or second charges if the friend needs some protection.
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Austyn JohnsonVerified
Founder at Mortgages For Actors
There could be a cause for issues further down the line if someone says you should have advised each family member separately so there were no feelings of duress. Also, maybe a full review to anyone gifting the deposit in case it puts them at detriment? The trouble is, ambulance chasers will find a way in somehow. Do the best you can every day.
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Rhys SchofieldVerified
Brand Director at Peak Mortgages and Protection
Being a guarantor is all fun and games until when you apply for your own mortgage and realise that lenders take that commitment into consideration for your own affordability calculations and won't lend you as much as a result.
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Tahina AktherVerified
Barrister and Co-Founder at Wildcat Law
Nothing breaks family and familial ties faster than disputes over money. In the family courts, we often see third parties involved in matrimonial finances. These are typically parents or other family members who have provided loans or guarantees to the couple. The problem is because they are family, they usually do this without any thought to drawing up a contract or setting out the basis they have provided the support, or even with any thought to the potential liability they are signing themselves up to if the relationship fails.
No one likes to think of the worst happening but it pays to plan for the worst and hope for the best. Legal advice prior to the help, in these situations, can save many months of problems and many thousands of pounds in costs.