These days buying a home is tough for anyone first entering the market, particularly for young adults. We all want the best for our children, no matter what age they are, and as a parent you can give your child a helping hand when it comes to them securing their first property.
Here’s how you can help, and an honest assessment of the benefits and pitfalls.
A parent-to-child loan is when a parent lends their child money. This can be either the full or partial deposit or to cover the full terms of the loan.
This is a formal, legally binding arrangement, administered by an independent third party. At the start of the loan period, both parties agree to terms including repayment amounts, a schedule and a process to manage defaults.
Benefits: You can set generous terms for your child, but your assets, savings and credit rating are somewhat protected as you are not the borrower.
Drawbacks: There are legal implications for your child if they have a spouse and the relationship breaks down, in that the spouse could try to claim some of the loan proceeds as an asset of the relationship to which they are entitled. There are also tax considerations for both parties.
If your child doesn’t have enough security for a mortgage, you could provide a family guarantee. This is where you use some of the equity in your own home as part of the security. For example, your equity might cover 20% of the security, and your child’s new property would be the other 80%. It’s also known as a guarantor loan.
This can be a temporary arrangement until your child has paid down the loan to an acceptable level.
Benefits: You have the option of guaranteeing only a portion of the loan.
Drawbacks: If your child defaults, your assets are at risk.
Becoming a co-applicant
You can help your child secure a loan if you sign on as a co-applicant. This means you’re equally as responsible as your child for meeting repayments. The lender will consider your assets in its borrower’s assessment.
Benefits: Your child can obtain a loan with a low income.
Drawbacks: If your child stops making repayments, you’re responsible for making them. If you can’t make the repayments, it will affect your credit rating.
When you give your child money but don’t expect it to be repaid, it’s considered a gift. You may need to sign a statement to say it’s a gift, not a loan.
Benefits: You can provide financial help, possibly without the legal, tax or financial implications of a formal arrangement.
Drawbacks: If your child has a spouse and their relationship breaks down, the former partner could make a claim for the property.
Assistance in kind
If you’re risk averse, consider providing assistance in kind; that is, covering some of the expenses that come along with buying a property. You could pay for services such as a property survey or conveyancing fees, or help with stamp duty.
Benefits: You can give practical financial assistance.
Drawbacks: The amount of money you provide may be more than what your child ends up spending. For example, you might want to contribute $20,000 but the services cost $15,000. In this case, the rest of the amount is subject to the terms of a gift or loan.
Make sure you’re well informed about your options when giving or lending money so you can remain in the best position to help your child become a home owner.
If you can’t afford to help your child out financially, remember the best gift you can give them is the gift of knowledge, so make sure they go into their first big purchase with their eyes wide open and with all the information available to help them make an informed choice.
Contact Own Home Loans to discuss the right financial arrangement for your family.