Want to help your child buy a property?
House prices remain high, the cost of living is skyrocketing, and young adults are taking low-paying jobs just to kick-start their careers and get a foot in the door. The chances of your adult children buying their first home on their own while they’re still young? Not impossible, but improbable. Did you know the average age for first homeownership has jumped up to 34.5 years?
Your child might be ready to spread their wings, but their bank account might have other plans… More and more young singles, couples, and families are at the whim of their landlords, or still living with parents and relatives while they save for a home deposit.
Help is at hand.
All parents want the best for their children, and for many, this means supporting them financially as they leave the nest and venture into homeownership. In fact, a recent report by the Australian Housing and Urban Research Institute states that 40% of people aged 25 – 34 ask their parents for assistance. Whether your child approaches you or you’re the one to put the offer on the table, the “Bank of Mum and Dad” is becoming an increasingly popular option.
With your help, your child is more likely to secure a mortgage (that would otherwise be out of reach) and access larger amounts of money for a deposit to secure a property. This gets them out of the rent-trap and allows them to build equity over the long term. And of course, the most advantageous reason to financially support your child’s homeownership is to get them out of the house!
Here are three ways you can do it.
1. Act as a guarantor.
This is probably to most popular way to provide the support your child needs. As a guarantor, you give up the title of your house as security to your child’s lending bank, and the bank has control over a portion of their security. It also means that your child won’t have to pay mortgage insurance, which could lead to a saving of up to $30,000.
The major risk with being a guarantor is that — in the worst-case scenario — the mortgage lender has the right to sell a child’s home and the parents' property to repay the loan amount. This could potentially leave the parents and child homeless. The good news is, this happens very rarely, but it’s important to ensure you understand all the risks.
A new study by Mozo confirmed that of those parents who acted as guarantors for their child, 26% reported their child had defaulted on their loan. This doesn’t necessarily mean the family home was taken by the bank, but the parents would have had to pick up the slack. If you know your child struggles with saving or managing their finances, entering into a guarantor agreement isn’t advised.
The main benefit to being a guarantor is that you’re able to support your child with no out-of-pocket expenses (unless things go very wrong). Guarantors are kept up to date with whatever the borrower pays, so you’ll never be blindsided and can help manage the payments if things start to go south.
2. Provide a cash boost.
If signing up as a guarantor doesn’t sound like the right fit for you, another option is providing a cash gift so your child can put down the required deposit. Most parents dip into their own savings to do this (Mozo revealed that 64% of parents do this), or take out a portion of their child’s inheritance. Some parents also arrange a payment plan with their child where the child agrees to pay it back overtime. A repayment agreement is between the two of you and can come with or without interest, depending on what you decide. It doesn’t have to be a formal written agreement, although some parents prefer it.
So, how much should you provide? It’s totally up to you. Perhaps your child already has most of the money they need, and only requires an additional $5,000 to reach their deposit goal. However, the average amount parents pay is an enormous $70,000!
The main benefit to offering cash is that you can lend a helping hand without risking your own home to potential foreclosure.
3. Draw on equity.
You may be in a favourable position where you can redraw a home loan secured against your family home. In this case, you can lend the required home deposit funds to your child for their home purchase. This strategy also helps your child avoid costly lenders mortgage insurance.
Do your research.
It’s important that you know what options you have when it comes to helping your child purchase their home. Talk to your bank and your child’s bank (if different to yours) about the most risk-averse option. We can help too — supporting your child in this area will likely have tax implications you should know about.
Contact us to talk about this in more detail.
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