Helping your children purchase a home

August 28, 2014
Rob Lees

“Can I please borrow some money?” It’s a question parents of grown up children are becoming familiar with these days – especially if their children are first homebuyers. Housing in the major cities is often unaffordable for many young people earning an average income. So what are parents to do? Here’s a quick guide to give you an idea of the positives and negatives of helping your children with a first home purchase.


Lending money for a home purchase


Lending your child money for a home purchase may seem like a logical solution when they have been unable to save up a down payment on their own, but there are risks associated with this generosity. Lending money to a family member always has the potential to create conflict. It also comes with complex tax implications. You'll need to charge interest on the loan to avoid having it classified as a gift, and the interest rate you charge must be in line with current federal rates.


While lending is a possibility that you can explore, deciding whether the option will work for you and your child depends on your unique situation. If you feel that your child is responsible enough to make repaying the loan a priority, this solution may work. Just be sure to consult with an accountant to comply with any tax regulations.


Gifting money for a home purchase


If you're financially able to do so, you may want to simply gift money to your child for the purpose of buying a home. However, it's important for you to understand that you won't have the legal right to dictate how the money is spent once it has been given as a gift.


Investing while helping your children


Anyone who has thought about property investment can achieve their investment goals while helping their children. You have the option to purchase a property and hold it in your name while allowing your child to live there for free or for an agreed boarding amount. However, be sure that your child understands the arrangement. You don't want to face a situation in which your child is under the impression that they will be the owner of the house.


Going guarantor


Of course, not every parent has a lump sum of money readily available to help their child build their home deposit. Thankfully, there is another way you can help your child onto the property ladder without having to actually provide them with cash.


Today, many lenders offer a ‘parental guarantee’ or ‘family pledge’ home loan feature.  Under the parental guarantee feature, parents can use their own home's equity to provide additional security for a portion of their child’s loan amount. This solution reduces the child’s loan to value ratio and can also save them a significant amount of money by reducing or even avoiding the need to pay Lender's Mortgage Insurance.


It's natural for parents to want to help their children become homeowners, but you should be cautious before lending or gifting any money. Be sure to think through and select an option that will work for you and your child without causing confusion or conflict. 


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Posted in: Home loans

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