The real estate market can be tough for young adults, but as a parent you may be able to lend a helping hand. We have explained some options below:
1) Family / Security Guarantee
If your child does not have enough security / deposit for a mortgage, you could provide a family guarantee. This is where you use some of the equity in your own home as part of the security. For example, your equity might cover 20% of the security, and your child’s new property would be the other 80%. It’s also known as a guarantor loan.
This can be a temporary arrangement until your child has paid down the loan to an acceptable level with a key benefit being that Lender’s Mortgage Insurance (LMI) is typically avoided.
- Benefits: You have the option of guaranteeing only a portion of the loan. Lenders Mortgage insurance (LMI) may be avoided
- Drawbacks: If your child defaults, your assets are at risk.
2) Become a Co-Applicant
You can help your child secure a loan if you sign on as a co-applicant. This means you’re equally as responsible as your child for meeting repayments. The lender will consider your assets in its borrower’s assessment.
- Benefits: Your child can obtain a loan with a low income.
- Drawbacks: If your child stops making repayments, you’re responsible for making them. If you can’t make the repayments, it will affect your credit rating.
When you give your child money but don’t expect it to be repaid, it’s considered a gift. You may need to sign a statement to say it’s a gift, not a loan.
- Benefits: You can provide financial help, possibly without the legal, tax or financial implications of a formal arrangement.
- Drawbacks: If your child has a spouse and their relationship breaks down, the former partner could make a claim for the property. There may be an impact on Centrelink entitlements.
4) Assistance in Kind
If you’re risk averse, consider providing assistance in kind; that is, covering some of the expenses that come along with buying a property. You could pay for services such as a building and pest inspections, insurance, conveyancing fees, or help with stamp duty and other charges.
- Benefits: You can give practical financial assistance.
- Drawbacks: The amount of money you provide may be more than what your child ends up spending. For example, you might want to contribute $20,000 but the services cost $15,000. In this case, the rest of the amount is subject to the terms of a gift or loan.
If you’re thinking about helping one of your children into the property market we can discuss the right financial arrangement for your family.
Contact us to arrange a no cost, no obligation discussion.