Should you help your children buy a house?
With first-time buyers finding it harder than ever to get a mortgage, some parents are giving their children a helping hand onto the property ladder. Of course, your opinion on this will be influenced by everything from your approach to parenting, your relationship with your kids, and your financial circumstances. If you decide to lend a helping hand, you need to be sure that you are going about it in the right way - to protect your own interests, as well as your children's.
But how does it all work and what are the potential pitfalls?
There are various ways in which parents can help their kids get onto the Australian property ladder. It is reported that 8 in 10 parents are prepared to lend a hand by providing some form of financial support in an effort to help their children enter the property market. According to Mortgage House, one of Australia’s largest independently owned non-bank retail lenders, these are some of the most common ways for parents to help out:
- Letting the kids to live at home while they save up
- Gifting all or part of the deposit
- Buying the home outright
- Providing a supplementary loan
- Acting as guarantor
Letting the kids live at home
One of the simplest ways to help your child save up for a deposit for their home is to let them continue living at home (or let them come back) for a period of time. That way, they can save on rent, and put the money away to save up for a deposit instead. Of course, this does mean that your household bills and utilities will increase, so you may want to make some arrangement for them to contribute something towards those costs.
Gifting the deposit
Parents who want to provide with the deposit for their child’s home must be aware that a gift is not repayable. Most banks will require parents to declare that there is no need for these funds to be repaid. In today’s market, the sum needed for a deposit is likely to be up to 25% of the cost of a home. While in most cases there are no tax implications on these gifts, it is worth checking with your financial adviser.
Buying your child’s home outright
Another strategy is for a wealthy parent to just purchase a home outright and give it to their child. Perhaps your child is a college student who doesn’t make much money and can’t realistically take on a mortgage. Perhaps they are just not at a point in their life where they can take on the financial responsibility of home ownership. However, this option comes with numerous tax implications for the parents as well as the child, so make sure you take legal advice if you want to avoid problems in case of unexpected death or family problems down the line.
Providing a supplementary loan
Parents who have finances available currently, but may rely on these finances in the future, may want to consider providing a supplemental loan to their children, potentially with low or no interest. This way, they will be in a position to save up for a deposit more quickly. For many, the loan will be an informal arrangement, but not having the right documentation can bring risks, just as with the previous option. As a minimum, the loan and its terms should be documented between the parties.
Acting as a guarantor
Parents can help their child buy a home without directly lending them money, by acting as guarantor on their mortgage. This means your income is considered when agreeing a mortgage deal, potentially allowing your child to borrow more. However, as a guarantor, you would have to agree to cover any monthly mortgage payments linked to your child's home if they were unable or unwilling to do so. Some lending institutions allow the guarantor to nominate the specific amount of which the guarantee is limited, rather than a traditional open guarantee for the entire amount, but again, lending arrangements should be documented for the good of both parties now and in the future.
For advice, quotations and answers to all your questions regarding first-time mortgages, contact Mortgage House today. Mortgage House was born in 1997 when founder Ken Sayer identified a clear need in the Australian mortgage industry for an alternative lending option to the big banks. Today, Mortgage House has become a genuine alternative and a major provider of home loans to the Australian public.