Over the past few years it’s become more common for parents to help their children purchase a property.
As property prices have risen sharply, entry into the property market is not as easy as it once was. Two major reasons for this are that property values have risen faster than incomes have, and the cost of living is higher than it was (relative to incomes).
A Guarantor Loan
A guarantor loan is a way that a close family member (often parents) can help provide a deposit for a home loan.
Generally speaking, a lender will need to see that a borrower is able to come up with a deposit on the property they wish to purchase, this shows the lender that they are a borrower that can manage money. It also gives the lender some security in the event that the borrower is unable to meet their repayments and they have to step in.
A guarantor loan works by having a parent put up equity from their own property (normally the family home) as a deposit. This means the borrower can potentially get a loan and also avoid the expense of Lenders Mortgage Insurance (LMI).
There are several considerations with this type of strategy. Here are two main ones to consider.
· The parent’s property is at risk in the event that you can’t meet the repayments.
· A guarantor loan also means you are effectively borrowing 100% of the property’s value. So it is important to ensure the total repayment together with other expenses like rates, insurance, utilities etc, is affordable. It’s also recommended to add at least 2% to the current loan interest rate to ensure a higher inevitable interest rate rises can also be handled.
A Gift
In some instances, parents will simply give their children a sum of money to use as a down payment on their first property.
A point to keep in mind; a lender will likely want to see a borro
Genuine savings is really just money a borrower has saved up over a period of time. Ideally, this would be a 20% deposit, but some lenders will accept as low as 5%.
However, lenders will typically want to see that these funds have been sitting in a bank account for some period of time.
The policy with genuine savings and gifts varies between lenders.
Property Co-ownership
While not as common, it is possible for parents and children to own a property together.
Before entering this type of arrangement it’s advisable to speak to an accountant who can direct you on the correct tax structure to use. This is due to the capital gains implications that might not be present with just a single property owner or a couple.
Another consideration with property co-ownership is how the arrangement works on a practical level. Who pays what and when? If you are living in the property do you pay rent to your parents, how much? These are some things that you will need to outline together, even before you begin searching for a suitable property.
The other consideration will be how you finance the property? Do the parents and child have regular incomes to service any debts? If one party does not have a regular income – for example, if the parents are retired or the children are students – then this might impact your ability to borrow.
Live at Home
Buying a property, renting it out and living with parents is a way for first home buyers to get a stronger footing into property ownership. The rent they’ll receive should cover most of the costs in owning a property. They will also have the benefit of their living expenses being less too. This can be a good opportunity to pay down debt and build some buffers before moving out of home. This works best if your child will make good use of the leg up by saving as much as they can during this time.
To finish up
If you are thinking of helping your child purchase their first home, be sure to reach out and get further advice. There are several things that should be considered before making your decision on how to help them, such as effects on borrowing (for you and them), impact on potential first homebuyer grants they may be eligible for, if this will impact your retirement benefits, how it effects your future borrowing capacity and more. That’s why you should get financial advice before embarking on any of these ways.
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