We will look at the following ideas:
Helping hand: loans and structures to help your children purchase
If your children are looking to buy a home, there are a number of things that can consider to give them a leg up onto the first rung of the property ladder. Usually, first time buyers need help with one major aspect: the deposit.
With property prices at all time highs it can be confronting for young first home buyers to consider saving the amount needed for a 20% deposit. In fact, it’s confronting for more buyers. Luckily, there are a number of things that you can do to help them sort out their first property deposit and get them into the market before prices start to rise to more prohibitive levels.
We will look at the following ideas:
- Providing them a cash gift or loan
- Saving for them from childhood
- Acting as guarantor
- Joint venture
- New mortgage products
Providing a cash gift
Firstly, you could consider a cash outlay. If you have enough funds on hand to lend them the deposit, with an understanding that they will eventually give it back or that it’s a gift, then it could be worthwhile to cut out the middleman and give them the necessary funds. However, this does leave you needing to chase them for the funds back and potentially out of pocket. Similarly, not everyone has the sort of money needed to buy a home sitting around as available cash. Some borrowers also do need to show genuine savings to get the loan – often a lump sum provided by another person will not count.
If your child is still young, you may want to consider putting some money away in a term deposit for them and encouraging them to add to this account. A proactive approach like this will not only teach them savings habits, which will be useful for later home ownership, but should leave them with a sizable deposit by the time they’re ready to buy.
Another option is to consider acting as a guarantor for your child. Effectively, your home has a mortgage taken over it by the lender to your child and you act as a form of security for their loan. You may require a certain level of equity in your current property for this to be viable, however it does allow your child to purchase without a deposit and potentially to borrow a higher amount. LMI can also potentially be reduced for the first home buyer, saving them thousands. You can opt to be guarantor for a certain amount of the loan, so speak to your broker and lender about the possibilities.
It may leave you at risk if your child defaults on their repayments or does not take the required insurances and significant damage occurs to the home. If you have any concerns that they will be unable to be disciplined enough to repay their own mortgage, then you may not necessarily want to commit your own home to the cause.
A joint venture may be one way for parents and their children to enter into a purchase together. While your child may not be able to afford to purchase the entire property on their own and you may not be keen to be a guarantor, you may be able to enter into a form of partnership with them. This way, you can both own a stake in the home and assist them into the responsibility of homeownership. At some point, they may be able to buy you out of your half or you could mutually agree to sell the property for them to purchase elsewhere solely in their name.
You can also split this in a number of ways. While both could contribute 50/50, you could decide to provide all of the deposit but allow your child to be responsible for all of the repayments and upkeep. At some point they could refinance, if they see growth in the property, or save up enough to repay you, depending on the arrangement you decide. The aim, usually, is for your child to eventually own the home unencumbered without your involvement.
However, this joint venture strategy will not work for all prospective home buyers. Some will be looking to buy as a step into independence and there may then be subsequent disagreements over how the home is used and priorities around repairs, maintenance and renovations. Bills may also be a source of difficulty and unless many different scenarios are discussed upfront then you may face continuous misunderstandings.
New innovative mortgage products
Increasingly, new mortgage products are available to allow parents to assist their children to buy a home. Some of these include special loans the parents provide to their children through a lender. Yet you don’t just need to help by getting involved in their mortgage or deposit, you could assist them by paying for some reports or for a buyer’s agent or for any number of assistances. It’s worth asking them what help they need most and having a lengthy conversation around what would be best.
The only option that works for everyone is for both you and your children to be honest about your fears and concerns, as well as what you are hoping for as an outcome.
Not every situation will suit all families and for those with multiple children you will want to know how assisting the first child looking to purchase may affect your potential to assist their siblings.