July 06, 2016
While increasing house prices means good news for current property owners and investors, the same can’t necessarily be said for first time buyers who are trying to get a foot in the door of the property market.
As a result, it is becoming increasingly common for parents to get financially involved in their children’s endeavours to purchase property.
If you’re a parent who finds themselves in this position, it is important to first consider your individual circumstances before determining how you’re best placed to lend a helping hand financially.
There are three common methods parents use to help their children onto the property ladder, including:
Family guarantee loans are becoming an increasingly popular way for first home buyers to get into the property market. Data from Mortgage Choice shows the number of first home buyers who would get their parents to go guarantor on their loan has almost tripled over the last three years.
By going guarantor on your child’s loan, you’d be allowing any equity built up in your property to be used as additional security for their loan.
While you aren’t required to exchange any money as a guarantor, you are legally responsible for paying back the entire loan (including any interest, fees and charges associated with the loan) if your child defaults and can no longer meet their mortgage repayments.
For this reason, it is important to seek independent legal and financial advice before going down this route. That way, you can ensure that both parties are equipped to make informed decisions about the best course of action to take.
Gifting cash for a deposit
Another popular option to help your children into the property market is to give them money to towards their home deposit.
Data from Mortgage Choice indicates that as many as one in three parents will give their children money to put towards a home deposit.
Some lenders will require the parents to put in writing that the money is a gift and doesn’t need to be repaid. By confirming this, your child’s borrowing capacity is increased as the lender does not have to account for a loan that needs to be repaid to you.
If, however, you do expect the money to be repaid at some stage, you shouldn’t state in writing that it is a gift. Once something is in writing, it is hard to un-do.
If you do give your children money towards their home deposit, it is important to note that they will still need to show (depending on the lender) evidence of genuine savings.
Most lenders will want to see that a potential borrower has the ability to save a consistent amount of money on a regular basis before approving a loan request.
Purchasing property in co-ownership
Popularity for this method has also increased in recent years, with the percentage of first home buyers looking to purchase property with their parents doubling since 2014.
Buying property with your children can help lift their borrowing capacity and essentially help them get their foot onto the property ladder sooner than if they had gone it alone.
If you are considering purchasing property in co-ownership with your child though, we’d encourage you to seek legal advice regarding the co-ownership arrangement. By seeking legal advice, it will help remove the likelihood of potential challenges or complications arising down the track, should circumstances change over time.
A legal co-ownership agreement will dictate what happens in the event that one party wants to sell the property or if one party can no longer meet their debt obligations.
Regardless of how you plan to help your child onto the property ladder, it is critical that you understand exactly what is involved. By knowing what you are getting yourself in for, you can make better decisions.
It is also important to speak with a professional mortgage broker – they will be able to talk you through all of your options and discuss exactly what is involved. From there, they will be able to highlight which option might work best for your circumstances.