An annexe isn’t just for granny, learn about the financial benefits of multigenerational living…
Getting on the property ladder is hard for young people and mortgage alternatives are needed. But which way should they turn?
As the value of properties continues to rise across the UK, it is difficult to understand what options are out there. No longer is it the case that a person/couple/family can go to their local bank or building society, easily apply for a mortgage with a reasonable deposit, get it granted and make their payments over the next 25 years before owning their property outright – throwing in the odd house move too along the way.
The average house price in the UK now stands at a record £266,000 according to the Office of National Statistics and by region, this varies enormously. While those in the North East may be fortunate to take advantage of an average house price of £150k, young people in London (£550k) and the South East (£350k) can only dream of getting on to that first rung of the ladder as wages stagnate and the cost of living increases year on year.
Alternative Mortgage Options Are Required
It’s clearly time for the traditional path to take a side step and allow young people to find an alternative to mortgages. But how?
In Britain over 45% of people surveyed said they do not have the confidence or the knowledge of alternatives to mortgage according to a survey from Market Financial Solutions. However, nearly one in 5 people questioned, said they had used alternative finance.
Here we have look at what some of these alternatives may be.
Mortgage Alternatives – Finance Options
Help to Buy
Help to Buy is a Government loan for people in England and Wales. The premise here is to encourage young people to save for a deposit on a house that the Government then “tops up” accordingly. This will help buyers to save and often enables a larger deposit.
To be eligible, the house being purchased can be a maximum of £600,000 in End and £300,000 in Wales.
While this is no doubt a great initiative for young people – it does not stop the need for a mortgage for the rest of the funding for a home and therefore does not meet our criteria.
For those struggling to find a mortgage or raise the capital needed for a large deposit, this is certainly an option.
Here, a buyer purchases between 25% and 75% of a leasehold property, moves in as if it is fully their own and pays rent on the remaining percentage. A great solution to move into your own home sooner as the theory is as the property value increases it allows you to “sell up” and then go on to own more, if not all of your next property.
It is a positive solution again but it still means a mortgage is required on the percentage you own. There is also the issue of having to find further regular payments for the rental proportion that you do not own yourself.
Add to this the fact that when you come to sell your own share of the property you may be narrowing down your market looking for people to buy a share in a home – however, there is mitigation to this risk – as before going on the open market, the housing association that owns the rest of the property will usually market your share itself without the need of an estate agent.
A more “traditional” alternative and often used in business – bridging loans are typically used when finance is needed quickly.
These are great if you’re buying a property at auction or if your existing property has not yet sold and they provide an alternative source of finance for the short term. However, there is no hiding the fact that usually they will be used – as the name suggests – to bridge a gap while awaiting a typical mortgage or alternative source of funds.
“Finance Free” Lending
These options are all fine if you want to avoid a traditional mortgage per se – but it doesn’t avoid the fact that you are still tied down to a debt from a financial institution – even if it isn’t your typical lender and often they are simply a way to cushion a traditional mortgage.
If you truly don’t want to have a mortgage around your neck for 25 years in the traditional sense – property crowdfunding may be an option you have considered.
The Crowdfunding route
Here, investors are brought together to join their funds enabling them to buy a house. Each investor gets a number of shares that is based on how much they invested initially – this can vary massively from person to person.
Once bought, the property is rented out and each investor gets their proportion of the rental income depending on how much they contributed. Add to this the change in value, and everyone gets a share based on how much money they contribute.
The property is then rented out, everyone gets their share of the rent, and as the house price changes, the value of shares change as well (NB – this could be up or down). So you can make money from rent and, if the value of the property rises, you share in the capital growth.
As property investment goes – this sounds like a viable option without huge amounts of investment needed from a mortgage. However, if you’re looking for a property as a home it won’t have the same appeal as you would be the one paying rent at an “inflated” rate.
And so that leaves us with one final option – one that works perfectly with an annexe build solution and provides a definite mortgage alternative.
The Bank of Mum & Dad
If we look to the generation before us, we can often be jealous of far lower house prices. As property prices have rocketed over the past 30 years, the money that has been raised is still available equity as parents want to support their children in getting on the property ladder.
A guide from Go Compare references the Council of Mortgage Lenders which found that 52% of young people buying a property got support from their parents or the aforementioned ‘Help to Buy’ Government scheme.
Whether it is an equity release or available cash funds that can be used to support their children – the average property value of over £250,000 to help a child buy a property outright may not be possible. But when that figure is more aligned to a budget of £75k-125k – there are many annexe options available for a much wider audience.
A Garden Annexe Home in Your Garden
Using the garden of an existing property in your family takes away many stresses from a family that needs to grow in terms of space, without additional lending and with the added value of adding value to a property.
We have many resources available that cover the many advantages of building an annexe in your garden including What is an Annexe, the true value an annexe can add to your home, practical advice including planning permission and legal considerations as well as how to make it a home with design ideas.
What is important to take from this post though is to understand:
- Buying an annexe outright provides a quality home at a fraction of the cost
- The occupants of the annexe will be mortgage-free
- It does not involve selling the original family home
Building an annexe on your property gives you the opportunity to provide a new home for your children while at the same time keeping them close by and giving you the independence you want as they lead their own lives.
It is a solution for families living closely together and also falls under the umbrella of a multigenerational home.
What is a Multigenerational Home
As the name suggests, multigenerational homes are designed and built to provide living space for a number of different generations in one family living “under one roof”. Traditionally they are very common in America but they are on the rise in the UK too.
A study in 2020 by Aviva found that 1 in 3 homes in the UK is in fact multigenerational. This is largely down to children that are in their 20s and 30s that are yet to fly the nest – mostly because of financial implications. But when you consider it – how many homes are built for this?
There are many advantages to a properly designed and built multigenerational home that allows for families to live in one house and still have their own space. Consider the following:
- More quality time with family
- Less financial burden on generations of the family that are unable to sustain this
- Support for different generations
Now think about the easiest way to create one; By using the space in your garden to build an annexe. Giving two living spaces on one property.
We’ll cover more on multigenerational properties in a future piece. For now, though, it is clear to see how this can provide a perfect solution for an alternative to a mortgage and much, much more.
Take Our Trusted Advice on Mortgage Alternatives
It is fair to say that covering this subject is a tricky path to take and there are many different mortgage alternatives that can work for different scenarios.
At iHUS we have been building annexes for the past decade and we have heard many stories of different financial needs. We’ve supported many families across the UK in creating a home that will be in their family for many years to come.
We are here to share that experience with you when it comes to creating your own home for a younger generation that can be used for many years ahead – all while remaining on the property that has been in your family for a generation or more already.
Speak to our friendly team who are ready to help.