4 Ways You Can Help Your Kids Buy Their 1st Home
In this day & age it's not uncommon for 1st Home Buyers to need a helping hand to get into a home.
And often the first port-of-call on the hunt for assistance - is the good old
'Bank of Mum & Dad'
There are several ways you can help your kids, but there are a few things you need to know before heading down this path. As if you're not careful you may just end up compromising your own financial position.
That's why we ALWAYS advise discussing your plans with a Mortgage Broker & Lawyer before you get the ball rolling.
Now with that disclaimer out of the way here are the 4 ways you can help your kids onto the property ladder.
Gift a deposit
Yes, you could simply give money directly. However, doing so can have its drawbacks. The biggest is that when you directly gift money it could become part of 'matrimonial property' and if they are in a relationship you may find a few years later that half your 'Gift' could end up with their ex-partner if they decide to separate. Independent legal advice is always recommended in these situations.
That's where lending the money as a no-interest, no repayment loan may be a better option. You can put conditions on that loan, such as only requiring repayment should the property sell, or relationship ends. As long as there is no commitment to formal ongoing repayments then most banks will be OK with this. And more importantly it won't negatively impact the amount your child is able to borrow.
On the other hand lawyers can be a little reluctant in establishing these types of agreements for two key reasons (remember their job is to have your best interest at heart)
- It relies on the good will of the borrowers (your child) as the loan is not secured so they may never repay it.
- You have no visibility over the actual loan - so your kids may borrow more against the property without your knowledge, or even get into financial problems which would make it harder to pay back the loan when the house sells.
Provide a 'limited guarantee'
This is where your own property is offered as partial security for your child to buy a home. The key here is you have 'Limited Liability' if things end up going a little askew. The liability is limited to the amount your children require to help purchase the property.
How it works is if your child has a lower deposit, say 10%, they may not have access to more favourable interest rates, cashback offers the banks 'normally' offer to first home buyers. They may even incur additional costs such as a low equity premium or low equity margin on their interest rates.
So by providing your 'Limited Guarantee' it lowers the risk to the bank for lending the money as they not only have the new property itself to fall back on but also your guarantee, should anything go wrong.
Once again lawyers can be wary on this option too.
Firstly there's potential for the bank to come knocking on your door if repayments fall behind - asking you for money or in the worst case scenario resulting in you needing to sell or borrow against your own home to repay debt incurred. But the bank can only claim for the amount of the limited guarantee that you signed for. So if it's a $20,000 guarantee that is required to help them into a property then only $20,000 (+ costs and expenses) can be claimed from yourself. And as before with gifting a deposit you're relying on your child's goodwill & that they will be financially responsible.
Create A Partnership
Another option is to go into partnership with your child, with the intention they could buy you out & take full ownership at a later date. This would mean you'd be named on the properties title as an owner & be on the loan agreements & liable for all of the lending. While behind the scenes there would be a 'partnership' agreement outlining how much each party owns etc.
As you'd expect this option provides you with a lot more visibility (& control) when it comes knowing loan amounts, if payments are being met or further lending applied for.
However, your children may not see it that way - and if you have multiple offspring you need to consider if this is something you can offer them all?
But in all these scenarios we recommend you seek independent legal advice not only from your solicitor but also your Accountant (if you have one).
Provide subsidized accommodation
Instead of gifting money, guaranteeing, or being part of owner of their new home, many parents will let them live cheaply in the family home or an investment property they own. This gives them the opportunity to save a larger deposit more quickly and clearly is a less 'risky' option to a parent in may ways.
However this may not necessarily be practical or suit all situations, particularly if you have many offspring - your 'nest' maybe full for a very long time.
As mentioned earlier it really all does come down to your own unique situation, preferences, & risk appetite when it comes to deciding how you'll help them get onto the first step of the property ladder.
If you'd like to discuss anything mentioned here further or your specific situation then give us a call, or send us a message. We are always more than happy to help you map out what would work best for you.