Family Deposit Mortgage in the UK – is it a good way to obtain a 100% LTV mortgage?

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?

First, you should understand one basic fact. 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 can be recovered after a certain period of time (usually 3-5 years, as specified in the agreement). A classic guarantor only signs a document that directly links their assets or part of their assets to the mortgage.

By paying such a deposit, the borrower’s family secures the mortgage — the money is only collected by the bank when 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 family deposit supplements this amount until the bank recovers the entire amount owed.

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 delays in the last few months (e.g. the last six months, the last 12 months). Another option is for the mortgage balance to fall below a certain LTV value. For example, if the mortgage initially has an LTV of 95%, the condition may be to repay enough capital to bring it down to at least 90%. These conditions vary greatly depending on the lender.

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

It turns out that 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 make any down payment 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 foreclosure 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 making a larger down payment, using a guarantor or using a family deposit.

The aforementioned 100% LTV is only one option — if the buyer has funds for a down payment, they can sometimes still use them. Combining a down payment with a security deposit will only improve their situation, e.g. by lowering the interest rate. 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.

End of the promotional period

With Family Deposit Mortgages, the moment when the deposit has been returned to the family and the promotional period is coming to an end is very important. Then, as in any other case, the interest rate changes to SVR (Standard Variable Rate), i.e. a rate set by the bank, which is much higher than the previous interest 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. Due to the release of the deposit, there is no factor that would guarantee the possibility of continuing to repay the mortgage on similar terms.

The chance that you will be able to repay at least 5% of the capital during the standard two-year promotional period (which would probably be enough to take out a 95% LTV mortgage under the Mortgage Guarantee Scheme) is quite small. Even if you were to aim for such a solution, you would have to overpay your mortgage to a large extent during this time, exposing yourself to the possibility of having to pay an Early Repayment Charge (ERC).

The only solution is therefore either to make a down payment or to re-create a security deposit, while freezing the family’s money for the next few years. As a result of this mechanism, a family deposit behaves in a similar way to a normal deposit made when purchasing a property, which:

• Is more mobile and returns to the family after each freeze period;

• Is less readily accepted by banks and offers fewer opportunities to reduce interest rates;

• Requires more formalities.

Greater risk associated with negative equity

Due to the fact that no own contribution was made in the case of 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 virtually no 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 would have to make a large down payment to reduce the LTV.

Who is the Family Deposit Mortgage for?

So who should consider a Family Deposit Mortgage? 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 down payment 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 a minimum of 95%, 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 definitely know about the alternative, known as a gifted deposit. In the United Kingdom, there are no legal restrictions preventing family members from paying the deposit on a mortgage for a descendant. This mechanism is called a gifted deposit, and the only requirement to use it is for the donors to write a gifted deposit letter, in which they declare that the funds transferred are a gift and they do not expect anything in return. Such a donation is also fully tax-exempt.

Summary

A Family Deposit Mortgage is a product that allows people with poor credit ratings to obtain a mortgage or improve its terms. It involves setting up a special bank account where funds deposited by the family will serve as collateral for the mortgage. The security deposit is returned to the owners at the end of the period specified in the agreement. If the property is repossessed, it is used to settle the debt to the lender.

Are these products only available to First Time Buyers ?

Family Deposit products are often promoted as a good solution for First Time Buyers, but there are no formal restrictions preventing people without FTB status from using them.

Can the funds from the security deposit be used to pay an overdue mortgage instalment ?

No, this deposit is solely a security for the mortgage, and the bank only uses it if it incurs a loss on the sale of a previously repossessed property.

Can a single deposit be used as security for several mortgages at the same time?

No, a family deposit can only secure one mortgage at a time.