PARENTS are fast becoming the last hope for cash-strapped first-time buyers after Abbey became the latest lender to abandon the 100% loan market last week.

However, mum and dad could find they are no longer able to use their home as a cash machine for the kids as lenders become more reluctant to allow homeowners to gear up against their properties.

While lenders are still allowing existing homeowners to release equity, you risk higher repayments if you borrow more than 75%.

Lenders such as Halifax charge up to 0.90% more on loans for those with 5% equity, as opposed to those with 25%, amounting to an extra £2,250 a year on a £250,000 loan.

Melanie Bien of broker Savills Private Finance said: “Traditionally parents thought if they had significant equity in their home it was okay to take out more. Now, with banks cutting the maximum loan available on some deals to 90% and offering significantly cheaper rates for those with 25% equity, parents want to make sure they don’t penalise themselves.”

This month Barclays became the first lender to cut homeowners’ credit limits when it informed Woolwich customers their “reserve facility” would be reduced to £100 unless they confirmed they wanted a larger amount.

Woolwich permits homeowners to draw against the equity in their home to fund expenses such as school fees or to help their children get on to the property ladder. For example, a homeowner with a £100,000 mortgage on a £200,000 property could draw a further £25,000 assuming the maximum loan available was 75%.

The interest charged on the extra amount is at the bank’s standard variable rate of 7.39%. Around 80% of Woolwich customers have the reserve, worth several hundred thousand pounds in credit in some cases.

Only those customers who haven’t used their reserve will have their limits cut.

Barclays said: “Over a third of our customers who have the facility have not used it – but we still have to set aside the capital against it. As such, we have decided to tidy up this facility. Customers who lose the facility can pay £150 to apply to have it increased again.”

The gulf between the rates being offered by lenders depending on the amount of equity widened further last month.

An analysis of Bank of England figures by Deutsche Bank showed the difference in the average fixed-rate deal for a borrower with a 5% deposit and a borrower with a 25% deposit increased to 0.86 percentage points in March, compared with 0.45 points in January.

A homeowner who remortgages with Halifax and has moved into the 75%-plus bracket but still has at least 10%, will have to pay 5.99% or £998 a month on a £200,000 loan, rather than £992 a month if the loan was still 75%. If the loan had moved above 95%, repayments would leap to £1,132 a month.

David Hollingworth of broker L&C said: “Most people won’t know what their property is worth so parents should stay on the safe side, bearing in mind that if you cross a threshold such as 75% you may end up paying more.” We show you how to help the kids.

GUARANTOR MORTGAGES

To boost the child’s borrowing ability when their income would otherwise be insufficient for the price of the home, some high-street lenders – including Abbey, Cheltenham & Gloucester and Halifax – will consider applications for a parent to be a guarantor on a mortgage.

Most mainstream deals will be available to guarantor mortgages – with lenders assessing applications on a case-by-case basis. Where the child defaults on repayments the lender can seek payment for the full loan amount from the parents.

Abbey said parental guarantees were “most likely to be accepted where the child is working and is almost able to afford the deal on their own” or “where the child has just started in a profession, for example, law and accountancy, where their income is likely to increase quickly as they progress”.

JOINT SIGNATORIES

Where a parental guarantee is not accepted, parents can become joint signatories to their offspring’s mortgage. The downside is that as a joint owner of the property, parents could find themselves liable for capital gains tax as it is not their main residence.

To avoid the CGT issue, Bristol & West offers “First Start mortgages” while Norwich & Peterborough has a “Lend a hand” deal, where the parents can be joint signatories on the mort- @ gage but not on the title. However, a two-year fix with First Start will cost £6,340 more over the life of the loan than Bradford & Bingley’s two-year fix at 5.59% for those with a 5% deposit.

SHARING

To avoid appearing on the mortgage at all, parents can choose to gift the deposit, and the buyer then joins up with friends to boost their income to satisfy the lender’s criteria.

Most lenders will allow up to four names on a mortgage, but only the two highest incomes are usually taken into account. Another option is Britannia’s “Sharetobuy” loan, which will lend three times the income for each party.

Hollingworth said: “Where buyers are sharing, they need to be sure they have legally binding agreements upfront should one party wish to go their separate ways.”

WITH A LITTLE HELP FROM MY MOTHER

ONE alternative to providing the deposit is to appear jointly on the mortgage with your children so both incomes are taken into account.

Ann Worrall appears on the mortgage with her son, Thomas, left, a PhD student. Thomas had a £6,350 deposit but would have only qualified for a £66,000 loan because he earns only £15,800.

Ann and Thomas took out a Bank of Ireland fixed-rate deal for three years at 6.35% via L&C, allowing Thomas to buy a £127,000 home in Coventry.

He said: ‘I’ll be studying for a few more years so this was the only way I was going to get on the property ladder.’

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