Thu, 28 Feb, 2019
How to help your children climb the property ladder
For all first-time home buyers, the process can be extremely difficult. Saving a deposit on even a modest income can be an uphill battle, not to mention the insecurity of property prices inflating and declining rapidly, which makes bank loan lending criteria even harder to obtain.
Many parents may have every intention to help their children buy their first home in today’s unstable climate – but what is the best way to help financially?
Considering becoming a co-owner in a property with your child may help protect your money and provide a little more ease of mind knowing you have shares in such an expensive investment.
If you decide to co-own a home with your child, your name will be registered on the property title – meaning selling or mortgaging the home is not possible without your permission or knowledge.
Co-ownership also allows you to trust that your money is in a secure investment as you can also share capital gains and even sign a Property Sharing Agreement with your child to flesh out who pays who, who gets to live in the home, what happens when property is sold and what happens if something goes wrong.
If you are in a position to lend money to your child in order to purchase a home, then this might be a method that works well for you and your family by lending money towards a deposit. However, jumping straight into it is a risky decision.
Consider a properly documented loan agreement which outlines regular repayment schedules and the longevity of the loan term. Is there interest your child must pay – if so, how much? Will the interest rate vary? If you have more than one child, will your generosity be lent to them also?
However, a bank may not be so willing to loan money to your child as they might ask for proof of equity in the property. A loan from a parent is just another debt to be repaid, not equity.
A bank might also need a commitment they will not have to compete with your child for loan repayments – before committing to lending your child repayments, consider how long you are willing to wait for your money to return to you and if you can financially survive without it until you get it back.
Many parents are willing to give away their money to their children – as they might have done for their whole parenting lives. However, gifting your children money may have repercussions for your retirement future. Consider how this may impact you. Will you have to work years longer if you gift money to your child? Are you financially able to relax after gifting money for a loan deposit?
It is also important to keep in mind banks do not take kindly to misleading statements – if you plan on loaning money to your child but say it is a gift, there may be serious repercussions for both yourself and your family.
Your child may ask for a guarantee on their bank debt meaning your position will not be much different from that of the loan borrower. In the case of a default, the bank may come after you before your child.
A bank may require you put your own home up as a security for the guarantee, which may result in you losing your own home to repay your child’s debt.
Consider how much exposure you are willing to commit to before taking a leap. Perhaps ensure your guarantee is limited to the absolute minimum the bank will allow and ensure you obtain independent legal advice.
If you are considering any of the options above to assist your child in purchasing their first home, seek out legal consultation to ensure your options are thoroughly explained.
Have you helped a child out with their first home purchase? Let us know in the comments below.