How can parents help you get a mortgage with a PhD stipend?
How can parents help you get a mortgage with a PhD stipend?
Published: 6th March 2022
There are three main ways in which a parent can help you get a stipend mortgage. They could act as guarantors on a joint borrower sole proprietor mortgage, buy the property with you and also be on the mortgage with you, gift you the money needed to make up your deposit, or even loan you the money to make up you deposit.
The first two methods don’t usually work in your favour as I’ll discuss below. The third and fourth options around increasing your deposit and are the most popular as they have the lowest cost to both you and your parent and usually allow the most flexibility.
Guarantor mortgage, also known as joint borrower sole proprietor mortgages (JBSP)
Lots of PhD candidates ask me if they are more likely to be able to get a mortgage if a parent goes on the mortgage with them. There are two ways for a parent to go on a mortgage with their child. The first is to simply buy the property with their child and own it jointly (I’ll discuss this in a minute). The second is to have what’s called a joint borrower sole proprietor mortgage, previously called a guarantor mortgage.
This is when two or more people are listed on the mortgage together, but only one actually owns the property. The advantage of this is that the new property doesn’t class as a second property for the parent (because they don’t own it, only the child does), but as the parent is listed on the mortgage their income can be used when assessing affordability.
This sounds great but it brings in its own limitations. Now that a parent is being named on the mortgage all of their expenditure will be considered too. If they have their own mortgage lenders will factor that into affordability, as well as their own living costs.
The biggest obstacle is the parent’s age. Most lenders will not allow a mortgage to go past planned retirement age. If your parent is 55 and they plan to retire at 65 you are now looking at a 10 year mortgage with is probably going to make the monthly payments unaffordable on your stipend.
What is usually the final nail in the coffin is that most joint borrower sole proprietor mortgages require income from the child. Not just income, but income that they accept as income. Unfortunately, I’m yet to find a lender that does joint borrower sole proprietor mortgages (which is quite niche in its self) that also accept stipend as a form of income (which is incredibly niche).
My PhD Stipend Mortgage Guide goes into detail on how to get a mortgage using only your stipend.
Buying the property with you
Whereas a JBSP mortgage isn’t usually the answer, keeping it simpler and having a conventional mortgage with a parent can open some doors. This method overcomes the fact that there are no mainstream JBSP lenders that accept stipend.
Buying with a parent (or sibling, partner, or friend, anyone really) now gives you access to lenders that accept stipend at high-street interest rates. From a mortgage perspective you’ll now be treated like any other applicants with the few lenders that accept stipend as a form of income. There are not many of them but the ones that do accept it are very good with it and don’t charge higher interest rates etc.
Buying with a conventional mortgage with a parent doesn’t eliminate all of the issues that a JBSP causes though. The lender will still take into account all of your expenses so if your parent already has a mortgage, loans or credit cards then theses will all be taken into account when calculating how much you can borrow together. Even if your parent doesn’t have a mortgage then the running costs of their own home will be taken into account.
The number one limiting factor is, as before, the parent’s age. The stipend friendly mortgage lenders won’t let the term of the mortgage go past their planned retirement age even if by then you would have finished your PhD and be earning more than the two of you combined at the point you originally applied. A 55-year-old parent applying with you who plans to retire at 65 could get 10-year mortgage. This would probably make the payment unaffordable for you alone and you would be reliant on them paying much of the mortgage. This is fine if they are able to do it.
The reason that most people don’t get prenatal help in this way though is that the new property would be owned by both of you and therefore you wouldn’t be classed as first time buyers for tax reasons. This could mean that you lose out on the advantages of being classed as a first time buyer. Not only this, the new property would be classed as a second home for your parent and therefore second home stamp duty needs to be taken into account.
These could be avoided using the final method I’m going to discuss.
Funding a larger deposit
The simplest way for parents to help you get a mortgage with a PhD stipend is to help fund your deposit. And when it comes to applying for a mortgage keeping things simple is a great advantage.
A larger deposit makes you more likely to be accepted in the first place as lenders are more lenient with their credit scoring the lower the loan-to-value mortgage you require. Somebody with not much credit history might get declined with a 5% deposit but accepted at a 10% deposit. Read more about minimum deposits here.
A larger deposit also comes with a lower interest rate. This will make your monthly payments lower and save you money over the initial period of the mortgage.
As you are the sole owner of the property there is no need to worry about the limiting factors such as your parents age, additional taxes that may need to be paid, or the more overall expensive products typical of JBSP mortgages.
A parent can simply gift you the money to use as a deposit. All a mortgage lender needs is a letter from the doner of the gift stating that it is a gift and for how much. There is no limit on the amount and it won’t affect things like the interest rate. In fact, as you’ll likely have a lower loan to value mortgage the interest rate will be lower in most cases as the banks see it as a less risky mortgage.
There is even a method that your parent can protect their gift and have their money returned to them when you sell the property, effectively loaning you the money for a deposit. This is done by the parent taking a charge on the property. This isn’t acceptable with most lenders but it can be done with the very best stipend friendly lender. Your parent should take legal advice on this.
This means that when you sell the property or if you remortgage when you have a professional salary and can afford to borrow more, you can pay them back. This is slightly more complicated than just a no obligation gift but it’s simple enough to protect their gift and help you avoid several years of rent.
The best bit is that your parent could even raise the money to gift you by borrowing money on their own mortgage. This is effectively the same risk to them as a JBSP mortgage as the lender has the right to peruse them for the JBSP mortgage, but without burdening you with the higher interest rates that JBSP mortgage usually come with.
The most efficient way a parent can help you buy a property while you’re a PhD candidate receiving a stipend is to increase your deposit, even if it means borrowing money themselves. This method gives the most flexibility in the term of the mortgage, keeping payments manageable during your PhD research, and usually has the lowest overall cost to both you and your parent.