Family Deposit Mortgages in the UK: How They Work and Risks

Lenders in the United Kingdom offer a wide range of credit solutions tailored to different customer situations. Among many popular products, such as joint mortgages, bridging loans or professional mortgages, there are also more niche solutions designed for a narrower audience. One of them is the so-called Family Deposit Mortgages, also known as Family Springboard or Family Assist Mortgages — we will discuss them in this article.

What is a Family Deposit Mortgage?

The product in question does not have a single specific name, so its label may vary depending on the lender. Banks or building societies use the following terms:

• Family Assist Mortgage;

• Family Assisted Mortgage;

• Family Springboard Mortgage (the name of a specific Barclays product);

• Family Mortgage.

Each of these terms refers to a product designed for people who do not have a large amount of money for a deposit, but whose family is able to guarantee part of the mortgage with their own money. This solution may be very similar to a Guarantor Mortgage, but in reality they are two different products — the main difference is that in the case of a Family Deposit Mortgage, the money is paid into a bank account in the form of a deposit, which is held for a period set out in the agreement (for example, five years with the Barclays Family Springboard Mortgage) and can then be recovered. A guarantor, by contrast, legally agrees to cover the repayments if the borrower cannot (and may put their own assets at risk), rather than setting money aside in an account.

By paying such a deposit, the borrower’s family secures the mortgage — the money is typically used by the lender only if it incurs a loss on the sale of the property after repossession. This means that the funds are safe as long as the borrower repays the mortgage instalments and complies with the terms of the agreement. If the bank repossesses the property and sells it for less than the outstanding balance of the mortgage, the money in the family deposit account can be used to cover the shortfall, up to the amount held in it.

As I mentioned earlier, the agreement specifies a period after which the bank returns the funds from the deposit to the owners. However, lenders often impose additional conditions that must be met for this to be possible. The most common is simply to pay the instalments on time — often requiring no missed payments in the last 12 months. With some lenders, such as Barclays, missed payments can mean the money is held for longer than the agreed period. These conditions vary greatly depending on the lender.

How does the presence of a family security deposit affect the borrower’s situation?

Using family savings as an additional security deposit for a mortgage gives the buyer a huge advantage. In such cases, lenders offer mortgages with up to 100% LTV, which means that buyers do not have to put down a deposit of their own and can borrow an amount equal to 100% of the property value.

Please note that in this article we are writing about security deposits. The word “deposit” itself usually means a down payment made by the buyer when purchasing a property. Family security deposits work differently, as discussed in this article.

Banks decide on such favourable terms due to the reduction in credit risk. By creating a security deposit, the buyer’s family, in a sense, gives the bank a guarantee that it will be able to recoup any losses with it.

For example, if a mortgage of £250,000 was granted (e.g. representing 100% of the property value) and, after repossession and sale, the bank recovered only £235,000, the remaining £15,000 would be collected from the account where the security deposit is held.

The fact that the bank’s risk is reduced with a Family Deposit Mortgage fits perfectly with the general rule that applies to most mortgages — the lower the bank’s risk, the better the mortgage terms. Any practice aimed at obtaining a mortgage with problematic creditworthiness or obtaining better mortgage terms is designed to reduce the bank’s risk — this can be done, for example, by paying a larger deposit, using a guarantor or using a family deposit.

The aforementioned 100% LTV is only one option — if the buyer has funds for a deposit, they can sometimes still use them. Combining their own deposit with a security deposit may improve the terms available, depending on the lender. However, it should be remembered that the possibilities of the product depend on the policy of the lender in question.

Family Deposit Mortgage – disadvantages and risks

The use of a security deposit involves several risks that are definitely worth considering.

When the deposit is released and the initial deal ends

With Family Deposit Mortgages, it is very important to plan for the point when the family money is released and the initial deal ends, whenever that falls under your agreement. When the initial deal ends, the interest rate usually moves to the lender’s Standard Variable Rate (SVR) or another follow-on rate set by the lender, which is usually higher than the initial rate.

At this point, the mortgage is usually refinanced, but in the case of a Family Deposit Mortgage, there is a problem in the form of a lack of further collateral. Once the family money has been released, there is no factor that would guarantee the possibility of continuing to repay the mortgage on similar terms.

Repaying 5% of the original loan does not by itself establish a 95% LTV. Your LTV depends on the outstanding balance and the property value accepted by the new lender, as well as its product criteria. Check eligibility for any Mortgage Guarantee Scheme product separately. Overpaying your mortgage may reduce the balance, but check any Early Repayment Charge (ERC).

Your options at this point may include switching to a new deal with your current lender, remortgaging if the LTV has fallen enough, reducing the balance with a lump sum, or setting up another family security deposit, which would freeze the family’s money for another few years. Compared with a cash deposit paid when buying a property, a family security deposit:

• Is returned to the family after the hold period, but the LTV of your mortgage stays high;

• Is offered by fewer lenders and may give fewer opportunities to secure a lower interest rate;

• Requires more formalities.

Greater risk associated with negative equity

Because no deposit of your own was paid with a 100% LTV Family Deposit Mortgage, the mortgage is granted for the entire value of the property. Imagine that while you are repaying the mortgage, the value of the property falls, e.g. as a result of a sudden economic crisis. In this situation, you would have very little capital repaid, and the price of your home would plummet. This creates a phenomenon called negative equity, which is a situation where the mortgage balance is greater than the value of the property. This would mean that if you wanted to remortgage, your property would not be able to fully secure the mortgage, and you may need to reduce the balance before you could remortgage with a new lender.

Who is the Family Deposit Mortgage for?

Considering how the product works and the potential risks, it is not a product for everyone, and usually, if it is possible to pay a traditional deposit, it is better to do so.

You should consider a Family Deposit Mortgage if you do not have savings for a deposit and your family has funds that they can ‘lend’ you to freeze in a bank account for several years. However, remember that once the security deposit is released, the problem of high LTV is not solved, and you need to find a solution that will allow you to obtain another mortgage on favourable terms. Alternatively, you can continue to repay the same mortgage, taking into account the high interest rate.

So if you decide to go for such a product, your strategy for the next few years should be to accumulate capital (e.g. in savings or by overpaying your mortgage) so that you can reduce the LTV of your mortgage to 95% or less, and preferably 90% or 85%, so that you do not need a security deposit to obtain favourable mortgage terms.

Gifted deposit

If you are considering a Family Deposit Mortgage, you should also know about the alternative, known as a gifted deposit, where family members give you money towards your own deposit. Most lenders accept a gifted deposit from a family member, subject to their own rules. Many lenders ask for a signed gifted deposit letter or declaration confirming that the money is a gift that does not have to be repaid, and may ask for evidence of where the money came from and carry out ID checks on the person giving it. No tax is normally payable when the gift is made, but it may count towards Inheritance Tax if the giver dies within 7 years, unless an exemption applies (for example, the £3,000 annual exemption).

Summary

A Family Deposit Mortgage can help buyers with little or no deposit borrow up to 100% of the property value, subject to the lender’s usual checks. It involves setting up a special bank account where funds deposited by the family serve as security for the mortgage. The security deposit is returned to the owners at the end of the period specified in the agreement, provided the lender’s conditions are met. If the property is repossessed and sold at a loss, the deposit may be used to cover the shortfall, up to the amount held.