September 27, 2016
Those who already own property enjoy rising house prices because it increases the equity they now own. Unfortunately the same can’t be said for first home buyers who are trying to enter the market.
The hardest thing for first home buyers to do is to save the deposit that is their contribution to the purchase.
This has resulted in an increasing trend of parents getting involved in their children’s first purchase.
If you’re a parent and find yourself in this position it is important for you to understand your individual circumstances before entering into a deal to help your children.
Here are the three most common ways parents help their children with their purchase.
Being a guarantor
This is an increasingly popular way for parents to help their children. According to data from Mortgage Choice, the number of parents going guarantor has tripled in the last 3 years.
This option does not require you to make a monetary contribution to your child’s purchase but requires you to use your house as additional security for your child’s loan. Therefore, in simple language, if your child defaults on their loan the lender may sell your property to recover their debt. While this might be extreme, parents need to know what they are getting into.
There are ways of ‘limiting’ the guarantee the parents provide, the bottom line is that if they can’t come up with the cash to pay out a loan in default then the lender can sell the property. If there is no loan default, then there are no issues but we’ve always got to consider the good and the bad.
We highly recommend the children have adequate amount of both income protection and income protection insurance while their loan is secured against both their home and their parent’s home – and I strongly believe parents should impose this on their children while both properties are ‘at risk’.
The second most popular way parents can help their children is to provide a gift to them to use as their contribution to the purchase.
If the children are still borrowing above 80% of the property they are purchasing they still need to normally show they have genuine savings (often 5% of the purchase price).
Lenders will often require parents to provide in writing the gift is ‘non repayable’ if it is genuinely a gift, otherwise lenders will consider it as a loan from the parents and factor it into the loan servicing calculations. A warning for parents – don’t put in writing that it is a gift if, in fact, it needs to be repaid in the future. We’ve seen several examples of gifts being given to a young couple who eventually separated and then argued whether it was a gift or a loan in the first place. Everyone’s happy to receive a gift but once it’s in writing, it’s permanent.
This involves the parents and the children becoming joint owners of the property. Different to option one where the children were the only owners of the property but the parents were on the loan as guarantors, now all parties are property owners.
It is possible for the parents and children to own a specific percentage of the property or they can be equal owners. It is important to consider individual circumstances when deciding the ownership split.
If the parents have owned property previously then the children now forfeit any rights to first home buyer benefits – whether this be a first home owner grant or stamp duty reduction – for this property and any future purchase they may do just in their own name.
As you can see helping your children is a great idea but you need to be fully aware of the implications with the scenario you choose. That’s where we can help to discuss with you the right structure for your (and your children’s) purchase.